Vivek Kaul
Ruchir Sharma is the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management. He is a regular sprinter and last year he participated in the World Masters, a track and field event for men and women over 35, running the 100 metre and 400 metre events. Earlier this month his bestselling book Breakout Nations – In Pursuit of the Next Economic Miracles won the Tata Literature Live! First Book Award.
Seated in his 19th floor office in the middle of what used to be Mumbai’s textile mill district he said “my problem with India when I wrote the book last year was whether expectations where running too high and that we were extrapolating 8-9% growth endlessly into the future. Expectations have been ratcheted down dramatically since then and now a 6% is taken as a new normal.”
Sharma is optimistic because expectations have been reset. But he still feels conflicted about India because he finds that at the centre things are dysfunctional. “One of the rules of the road I had in the book that typically the average life of a good government is seven to eight years. After seven-eight years you tend to get diminishing returns for government. This is true about even best governments in the world led by the likes of Margret Thatcher, Francois Mitterrand and there are very few outliers like Lee Kuan Yew who do well for decades,” said Sharma. “No matter what the government does now, whatever reforms they announce is viewed cynically, and it doesn’t stick because the credibility is just so slow after being in power for so long,” he added.
His other big worry are the bureaucrats in Delhi who are not cooperating and seem to be hedging their bets. “From whatever I get to gather is that the bureaucracy is not that cooperative anymore because they are scared about being associated with any decision. You never know as to how they will be investigated further. Second problem is that some bureaucrats are also not keen to be too closely aligned with the government because they don’t know what is going to happen after 2014. So they are into hedging their bets,” explained Sharma. “Bureaucrats also feel let down by the politicians for having been arm twisted into taking decisions on behalf of politicians which were not always the correct decisions for the country and now they are paranoid to take any decisions,” he added.
The good thing Sharma feels is that the government has at least recognised that they have a problem at their hands and keep spending their way to eternity. “Till a year ago, even in April, there was no recognition of the problem. And that to me is at least a positive that we can look on,” he said. “The real fear that I have now is that we do all this now and this is only prepping up to put out another populist scheme at the end of it, at the first sign when things are manageable. To me the real signal will come if they back down on these populist schemes such as the whole food subsidy bill etc. Not because it’s bad thing to do, but you can’t keep writing cheques which the exchequer can’t cash.”
Once, the government stops being populist only then can they control inflation and thus hope to bring down interest rates. As Sharma puts it “The problem is the same that unless we put an end to this populist surge in terms of spending you can’t get a meaningful decline in interest rates. That really is at the core of the problem as far as inflation and interest rates are concerned. How do you put an end to that culture? That genie is out of the bottle. How do you put it back in?.”
Also, the risk of a downgrade by one of the rating agencies is terribly overdone feels Sharma. “I just feel this fuss about that is really overdone to be honest with you because who cares! They are far behind, so whether we get downgraded or not, to me it just doesn’t matter. The reasons for the downgrade are already well known. If it happens it will be a formality. It will be a short term negative undoubtedly,” he said.
The article was originally published in the Daily News and Analysis (DNA) on November 26, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
Ruchir Sharma
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 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])
Of 9% economic growth and Manmohan’s pipedreams
Vivek Kaul
Shashi Tharoor before he decided to become a politician was an excellent writer of fiction. It is rather sad that he hasn’t written any fiction since he became a politician. A few lines that he wrote in his book Riot: A Love Story I particularly like. “There is not a thing as the wrong place, or the wrong time. We are where we are at the only time we have. Perhaps it’s where we’re meant to be,” wrote Tharoor.
India’s slowing economic growth is a good case in point of Tharoor’s logic. It is where it is, despite what the politicians who run this country have to say, because that’s where it is meant to be.
The Prime Minister Manmohan Singh in his independence-day speech laid the blame for the slowing economic growth in India on account of problems with the global economy as well as bad monsoons within the country. As he said “You are aware that these days the global economy is passing through a difficult phase. The pace of economic growth has come down in all countries of the world. Our country has also been affected by these adverse external conditions. Also, there have been domestic developments which are hindering our economic growth. Last year our GDP grew by 6.5 percent. This year we hope to do a little better…While doing this, we must also control inflation. This would pose some difficulty because of a bad monsoon this year.”
So basically what Manmohan Singh was saying that I know the economic growth is slowing down, but don’t blame me or my government for it. Singh like most politicians when trying to explain their bad performance has resorted to what psychologists calls the fundamental attribution bias.
As Vivek Dehejia an economics professor at Carleton University in Ottawa, Canada, told me in a recent interview I did for the Daily News and Analysis (DNA) “Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions we look more at the situational factors and less at the idiosyncratic individual subjective factors.”
In simple English what this means is that when we are analyzing the performance of others we tend to look at the mistakes that they made rather than the situational factors. On the flip side when we are trying to explain our bad performance we tend to blame the situational factors more than the mistakes that we might have made.
So in Singh’s case he has blamed the global economy and the deficient monsoon for the slowing economic growth. He also blamed his coalition partners. “As far as creating an environment within the country for rapid economic growth is concerned, I believe that we are not being able to achieve this because of a lack of political consensus on many issues,” Singh said.
Each of these reasons highlighted by Singh is a genuine reason but these are not the only reasons because of which economic growth of India is slowing down. A major reason for the slowing down of economic growth is the high interest rates and high inflation that prevails. With interest rates being high it doesn’t make sense for businesses to borrow and expand. It also doesn’t make sense for you and me to take loans and buy homes, cars, motorcycles and other consumer durables.
The question that arises here is that why are banks charging high interest rates on their loans? The primary reason is that they are paying high interest rate on their deposits.
And why are they paying a high interest rate on their deposits? The answer lies in the fact that banks have been giving out more loans than raising deposits. Between December 30, 2011 and July 27, 2012, a period of nearly seven months, banks have given loans worth Rs 4,16,050 crore. During the same period the banks were able to raise deposits worth Rs 3,24,080 crore. This means an incremental credit deposit ratio of a whopping 128.4% i.e. for every Rs 100 raised as deposits, the banks have given out loans of Rs 128.4.
Thus banks have not been able to raise as much deposits as they are giving out loans. The loans are thus being financed out of deposits raised in the past. What this also means is that there is a scarcity of money that can be raised as deposits and hence banks have had to offer higher interest rates than normal to raise this money.
So the question that crops up next is that why there is a scarcity of money that can be raised as deposits? This as I have said more than few times in the past is because the expenditure of the government is much more than its earnings.
The fiscal deficit of the government or the difference between what it earns and what it spends has been going up, over the last few years. For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore. It went up to Rs 5,21,980 crore for financial year 2011-2012. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore.
This difference is made up for by borrowing. When the borrowing needs of the government go through the roof it obviously leaves very little on the table for the banks and other private institutions to borrow, which in turn means that they have to offer higher interest rates to raise deposits. Once they offer higher interest rates on deposits, they have to charge higher interest rate on loans.
A higher interest rate scenario slows down economic growth as companies borrow less to expand their businesses and individuals also cut down on their loan financed purchases. This impacts businesses and thus slows down economic growth.
The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum. One of the programmes that benefits from the government subsidy is Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The scheme guarantees 100 days of work to adults in any rural household. While this is a great short term fix it really is not a long term solution. If creating economic growth was as simple as giving away money to people and asking them to dig holes, every country in the world would have practiced it by now.
As Raghuram Rajan, who is taking over as the next Chief Economic Advisor of the government of India, told me in an interview I did for DNA a couple of years back “The National Rural Employment Guarantee Scheme (NREGS, another name for MGNREGA), if appropriately done it is a short term insurance fix and reduces some of the pressure on the system, which is not a bad thing. But if it comes in the way of the creation of long term capabilities, and if we think NREGS is the answer to the problem of rural stagnation, we have a problem. It’s a short term necessity in some areas. But the longer term fix has to be to open up the rural areas, connect them, education, capacity building, that is the key.”
But the Manmohan Singh led United Progressive Alliance seems to be looking at the employment guarantee scheme as a long term solution rather than a short term fix. This has led to burgeoning wage inflation over the last few years in rural areas.
As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles “The wages guaranteed by MGNREGA pushed rural wage inflation up to 15 percent in 2011”.
Also as more money in the hands of rural India chases the same number of goods it has led to increased price inflation as well. Consumer price inflation currently remains over 10%. The most recent wholesale price index inflation number fell to 6.87% for the month of July 2012, from 7.25% in June. But this experts believe is a short term phenomenon and inflation is expected to go up again in the months to come.
As Ruchir Sharma wrote in a column that appeared yesterday in The Times of India “For decades India’s place in the rankings of nations by inflation rates also held steady, somewhere between 78 and 98 out of 180. But over the past couple of years India’s inflation rate is so out of whack that its ranking has fallen to 151. No nation has ever managed to sustain rapid growth for several decades in the face of high inflation. It is no coincidence that India is increasingly an outlier on the fiscal front as well with the combined central and state government deficits now running four times higher than the emerging market average of 2%.” (You can read the complete column here).
So to get economic growth back on track India has to control inflation. The Reserve Bank of India (RBI) has been trying to control inflation by keeping the repo rate, or the rate at which it lends to banks, at a high level. One school of thought is that once the RBI starts cutting the repo rate, interest rates will fall and economic growth will bounce back.
That is specious argument at best. Interest rates are not high because RBI has been keeping the repo rate high. The repo rate at best acts as an indicator. Even if the RBI were to cut the repo rate the question is will it translate into interest rate on loans being cut by banks? I don’t see that happening unless the government clamps down on its borrowing. And that will only happen if it’s able to control the subsidies.
The fiscal deficit for the current financial year 2012-2013 has been estimated at Rs Rs Rs 5,13,590 crore. I wouldn’t be surprised if the number even touches Rs 600,000 crore. The oil subsidy for the year was set at Rs 43,580 crore. This has already been exhausted. Oil prices are on their way up and brent crude as I write this is around $115 per barrel. The government continues to force the oil marketing companies to sell diesel, LPG and kerosene at a loss. The diesel subsidy is likely to continue given that with the bad monsoon farmers are now likely to use diesel generators to pump water to irrigate their fields. With food inflation remaining high the food subsidy is also likely to go up.
The heart of India’s problem is the huge fiscal deficit of the government and its inability to control it. As Sharma points out in Breakout Nations “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
These details Manmohan Singh couldn’t have mentioned in his speech. But he tried to project a positive picture by talking about the planning commission laying down measures to ensure a 9% rate of growth. The one measure that the government needs to start with is to cut down the fiscal deficit. And the probability of that happening is as much as my writing having more readers than that of Chetan Bhagat. Hence India’s economic growth is at a level where it is meant to be irrespective for all the explanations that Manmohan Singh gave us and the hope he tried to project in his independence-day speech.
But then you can’t stop people from dreaming in broad daylight. Even Manmohan Singh! As the great Mirza Ghalib who had a couplet for almost every situation in life once said “hui muddat ke ghalib mar gaya par yaad aata hai wo har ek baat par kehna ke yun hota to kya hota?”
(The article originally appeared on www.firstpost.com on August 16,2012. http://www.firstpost.com/economy/of-9-economic-growth-and-manmohans-pipedreams-419371.html)
Vivek Kaul is a writer and can be reached at [email protected]
Is Manmohan following Lalu’s no-growth Bihar strategy?
Vivek Kaul
In a piece titled Farewell to Incredible India, which deals with the current economic problems in India, The Economist writes: “The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back.”
Leonid Brezhnev was the General Secretary of the Central Committee (CC) of the Communist Party of the Soviet Union (CPSU). He ruled the country from 1964 till his death in 1982.
I guess The Economist looked too far. They could have found someone right here in India to describe the complacency of the Manmohan Singh-led United Progressive Alliance(UPA) government. The man I am talking about is none other than Lalu Prasad, the former railway minister and former chief minister of Bihar.
Yes, you read it right. Before I get into explaining why I just said what I did, let us go back a little into history.
The lucky Lalu Yadav
Lalu Yadav re-entered politics in 1973, just by sheer chance. He didn’t have to struggle for it. The opportunity just fell into his lap.
As Sankarshan Thakur writes in Subaltern Sahib: Bihar and the Making of Lalu Yadav, “On the eve of elections of Patna University Students Union (PUSU) in 1973 non-Congress student bodies had again come together, if only for their limited purpose of ousting the Congress. But they needed a credible and energetic backward candidate to head the union. Lalu Yadav was sent for.”
The only trouble was that Lalu Yadav was no longer a student, but was an employee of the Patna Veterinary College. He had quit student politics in 1970, after having lost the election for the presidentship of PUSU to a Congress candidate. Before this, Lalu had been the general secretary of PUSU for three consecutive years.
But Lalu got around the problem. “Assured that the caste arithmetic was loaded against the Congress union, Lalu readily agreed to contest. He quietly buried his job at the Patna Veterinary College and got a backdated admission into the Patna Law College. He stood for elections and won. The non-Congress coalition in fact swept the polls,” writes Thakur.
And from there on Lalu Yadav went from strength to strength. In 1974, the students’ agitation against then prime minister Indira Gandhi spread throughout the country. As Thakur points out, “An agitation committee was formed, the Bihar Chatra Sangharsh Samiti to coordinate the activities of various unions and Lalu Yadav as president of PUSU was chosen its chief.”
These events catapulted Lalu Yadav into the big league. In the 1977 elections, Lalu was elected to the Lok Sabha as a Janata Party candidate at a young age of 29.
Chief Minister of Bihar
VS Naipaul once described Bihar as “the place where civilisation ends”. Lalu Prasad first became the chief minister of Bihar in 1990. Between him and his wife Rabri Devi they largely ruled the state till 2005, and almost brought civilisation to an end.
When India was going from strength to strength with economic growth rates that it had never seen before, the economy of Bihar was shrinking in size. As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles , “Bihar was the only Indian state that not only sat out India’s first growth spurt but also saw its economy shrink (by 9 percent) between 1980 and 2003.”
Lalu and his wife Rabri ruled for the major portion of the period between 1980 and 2003. Economic development was nowhere in the agenda of Lalu and on several occasions when questioned about the lack of economic development in the state, he replied that economic development does not get votes. And he was proved right.
In fact such was Lalu’s lack of belief in development that even money allocated to the state government by the Central government remained unspent. As Santhosh Mathew and Mick Moore write in a research paper titled State Incapacity by Design: Understanding the Bihar Story, “Despite the poverty of the state, the governments led by Lalu Prasad signally failed to spend the money actually available to them: ‘…Bihar has the country’s lowest utilisation rate for centrally funded programs, and it is estimated that the state forfeited one-fifth of central plan assistance during 1997–2000.’”
Between 1997 and 2005, the Ministry of Rural Development allocated Rs 9,600 crore. Of this, nearly Rs 2,200 crore was not drawn. And of the money received only 64 percent was spent. Similarly, money allocated from other programmes was also not spent.
How did he survive?
Lalu survived by building a potent combination of MY (Muslim + Yadav) voters. The Yadavs are the single largest caste in Bihar. Such was his faith in the MY voters that Lalu did not even promise development, like most politicians tend to do. As Mathew and Moore write: “He finessed this problem…by departing from the normal practices of Indian electoral politics and not vigorously promising ‘development’. For example, if during his many trips to villages he was asked to provide better roads, he would tend to question whether roads were really of much benefit to ordinary villagers, and suggest that the real beneficiaries would be contractors and the wealthy, powerful people who had cars. He typically required a large escort of senior public officials on these visits, and would require them to line up dutifully and humbly on display while he himself was doing his best to behave like a villager. He might gesture at this line-up and ask ‘Do you really want a road so that people like this can speed through your village in their big cars?’”
So what was Lalu Yadav trying to do here? “Lalu Prasad Yadav was not trying to fool most of his voters most of the time. He was offering then tangible benefits: respect (izzat – a Hindi term that he employed frequently) and the end of local socio-political tyrannies
Where does Manmohan Singh fit in here?
Some time after Lalu Yadav became the chief minister of Bihar, India had a financial crisis. PV Narasimha Rao was looking for a technocrat for the Finance Minister’s position. He first approached Dr Indraprasad Gordhanbhai Patel, who was the Governor of the Reserve Bank of India(RBI) from 1977 to 1982. Patel refused and suggested the name of his successor at the RBI, Manmohan Singh, who had been the Governor of the RBI from 1982 to 1985. Singh had just taken over as the Chairman of the University Grants Commission (UGC) in March 1991. He was pulled out of there and made the Finance Minister of India. And thus started Singh’s second career. Like Lalu, Singh’s career got a second life.
And he, like Lalu, before him went from strength to strength and finally became the Prime Minister of India. A few days ago, Mamata Banerjee had even proposed his name for President. He would make for an excellent President given that the Indian President doesn’t really do anything, except what the government (in this case Sonia) wants him to.
If Pratibha Patil, who no one had ever heard of, could become the President of India, so can the much more loyal Manmohan. He fits all the parameters Sonia Gandhi is looking for in a President. But the trouble, of course, is she wants the same parameters in her Prime Minister as well. And he can’t be at two places at the same time. So Singh’s name as a presidential candidate has been rejected by the Congress party. It would have been a rather glorious end to an “illustrious” career.
The irony
However what is ironic is that a man, who once spearheaded the economic reform process in India, has now totally withdrawn himself from the same. In fact, at times one wonders whether it is even a priority with him and his government? Now that Pranab Mukherjee is leaving the finance ministry for Rashtrapati Bhawan, we will find out what Manmohan has in store.
There has hardly been any response from the UPA government to the recent low GDP growth rate number of 5.3 percent for the period between January and March 2012. Pranab Mukherjee has blamed the slow growth on the problems in Greece in particular and Europe in general. This is a typical Lalu response where the old adage “if you can’t convince them, confuse them” is at work. The problems of India are not because of problems in Greece or Europe, but because of the economic policies of the Manmohan Singh-led UPA government. (It’s not Greece: Cong policies responsible for rupee crash).
As The Economist puts it, “India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.”
In fact, there is a state of total denial within the UPA that there are serious economic problems facing India. The spin-doctors of UPA are even working overtime to sell the country that famous song from 3 Idiots “All is Well“. On a recent TV show, Montek Singh Ahulwalia, the deputy chairman of the Planning Commission, kept insisting that a 7 percent economic growth rate was a given. As it turned out the GDP growth rate fell to 5.3 percent.
Economic development doesn’t matter
The way the UPA government has been working over the last few years, it is very easy to conclude that economic development of this country isn’t really top of the agenda. Like was the case with Lalu Yadav.
The solutions to the problems are simple and largely agreed upon by everyone who has an informed opinion on the issue. As The Economist puts it, “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But then there is hardly any policy coming out of the government. So what is top of the agenda? To stay in power and enjoy its fruits? And by the time the 2014 elections come around, set the stage ready for Rahul Gandhi to take over? But the question that crops up here is this: like Lalu, does the Manmohan Singh-led UPA have a MY formula? And even if it does have a formula, will it work?
Lalu found out in 2005 that formulas become useless over a period of time. “We could not make it because of overconfidence and division in Muslim-Yadav (votes),” Lalu told India Today magazine after his defeat to Nitish Kumar in the 2005 election.
Overconfidence is the word the Manmohan Singh led UPA needs to watch out for.
(The article originally appeared on www.firstpost.com on June 16,2012. http://www.firstpost.com/politics/is-manmohan-following-lalus-no-growth-bihar-strategy-345933.html)
(Vivek Kaul is a writer and can be reached at [email protected])