subsidies

Please cut our losses

narendra_modiVivek Kaul  

The investment industry suddenly got into an overdrive in the aftermath of the Narendra Modi-led Bhartiya Janata Party (BJP) winning a majority in the 16th Lok Sabha on its own. Both Indian and foreign stock brokerages immediately upped their Sensex/Nifty targets and categorically stated that the Indian stock market is ready for its next big bull run. Of the many targets bandied around, the most optimistic target was that of Sensex touching 35,000 points by the end of December 2015. It currently quotes at around 24,200 points.
Now, every bull run has a theory behind it. What is the theory behind this bull run? The investing community is of the opinion that the new Modi government will take measures to set the Indian economy back on track. But that is nothing more than hope and hope alone can’t  go a long way.
In the noise of the elections what everybody seems to have forgotten is that the Indian economy is still in a bad shape. The gross domestic product (GDP) numbers that were released on May 30 showed that economic growth, as measured by the growth in GDP for the year ending March 31, 2014, stood at 4.7 per cent. It was the second straight year of less than 5 per cent economic growth. Rather worryingly, the manufacturing sector contracted by 0.7 per cent during the course of the year.
Setting this right will be a major long-term challenge for the Modi government. Economic history clearly shows that countries which have moved from being developing to developed at a fast rate have done so by creating jobs in the manufacturing sector. That hasn’t happened in India as yet.
When it comes to short term challenges, the fiscal deficit remains one of the bigger challenges. Fiscal deficit is the difference between what a government earns and what it spends. The fiscal deficit during the rule of the Congress-led UPA government burgeoned big time. In the interim budget presented in February, the then finance minister, P. Chidambaram, claimed to have brought it down to Rs 5,24,539 crore or 4.6 per cent of the GDP. Numbers later released by the Controller General of Accounts suggest that the fiscal deficit for the year ending March 31, 2014, came in a little lower at Rs 5,08,149 crore.
But this was primarily achieved by cutting down on the asset creating planned expenditure and by not recognising’certain’expenses which in total amounted to more than Rs 1,00,000 crore (their recognition was postponed to this financial year, i.e. the year starting April 1, 2014). This primarily includes oil, food and fertiliser subsidies. This anomaly needs to be set right. More than anything, the Government of India should not be indulging in what is a clear accounting fraud. One of the basic tenets of accounting is to recognise expenditure during the period it is incurred. In the short run, if this leads to the actual expenditure of the government shooting up, then so be it.
The government can, instead, look at encashing some low-hanging fruit. SUUTI (Specified Undertaking of the Unit Trust of India) holds shares of bluechip companies like ITC and L&T which are worth around Rs 42,400 crore currently. SUUTI was formed in the aftermath of the Unit Trust of India going bust in early 2000s. These shares can be sold to help shore up the government revenues.
Over and above this, the BSE PSU Index has gone up by 36 per cent since the beginning of this year. What this means is that the government can use this opportunity to sell shares it owns in a host of public sector units (PSUs). Take the case of Coal India Ltd. There is no reason that the government has to own 89.65 per cent of the company. Even at a significantly lower stake, it can retain the management control of the company.
Along similar lines, the government needs to bring down its stakes in public sector banks (PSBs). Currently, India has 27 PSBs. Why does the government need to run 27 banks? There is clearly no logic to it. A lot of money can be raised by selling shares of PSBs. Money can also be raised by quickly selling telecom spectrum. The last auction which happened in February 2014 fetched the government close to Rs 61,000 crore. There are a whole host of loss making PSUs which are sitting on a lot of land in premier locations. This land needs to be monetised.
It needs to be pointed out that trying to meet regular expenditure by selling assets is not the best idea going around. It is like you and me trying to meet our regular expenditure by selling things that we own. It may be necessary sometimes in the short run. What can also be done is that some of the money coming in through the sale of assets can be used to set up an infrastructure fund. The allocation to this fund can be increased over the years, and this money can be used to boost the physical infrastructure across the country.
Other than trying to raise revenues, the government should also try and limit its losses. Air India, which has constantly been losing money, either needs to be shut down or just sold off (assuming we can find a buyer for it).
Many analysts and experts want the government to cut down on expenditure allocated towards programmes like NREGA and the Food Security Scheme. This may really not be possible given that the BJP had voted to legislate them.
But what the government can easily do is to get the Food Corporation of India (FCI) to go slow on its purchases of rice and wheat. Currently, FCI has double the stocks than what it actually needs. Going slow on purchases can really help control the government expenditure. It will also help to control food inflation, given that more rice and wheat will land up in the open market.
To conclude, the economic scenario remains a huge challenge for the new Modi government, but to get going it can cash in on the low-hanging fruit.
This article originally appeared in The Asian Age/Deccan Chronicle dated June 4, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

To meet fiscal deficit, Chidu does an Enron, junking all accounting principles

P-CHIDAMBARAMVivek Kaul  
The Mint newspaper has a very interesting article today on the finance minister’s P Chidambaram’s latest move to use the Reserve Bank of India(RBI) to help meet the fiscal deficit target of 4.8% of the GDP, set at the beginning of this financial year. Fiscal deficit is the difference between what a government earns and what it spends.
As per this plan the finance ministry is talking to the RBI for an interim payment or transfer of the central bank’s income. The RBI follows an accounting year of July to June. Given that, it usually transfers its income to the central government in August every year. Last year, the central bank had handed over Rs 33,100 crore to the government and the year before last, it had handed over Rs 16,100 crore.
But the government does not want to wait till August this year. It wants the central bank to pay up immediately, in order to contain the burgeoning fiscal deficit. The trouble is that the RBI Act does not have a provision for transferring surplus before the accounting year ends.
The government is desperate for any revenue irrespective of where it comes from. The fiscal deficit for the nine month period between April and December 2013, stood at Rs 5,16,390 crore or 95.2% of the annual target of Rs 5,42,499 crore (or 4.8% of the GDP as estimated in the budget presented in February 2013).
For the first nine months of the financial year, the government has run an average fiscal deficit of Rs 57,377 crore (Rs 5,16,390 crore/12). But for the remaining three months, it has very little room.If the government has to match the numbers projected in the budget presented in February 2013, over the next three months it can run a fiscal deficit of only around Rs 26,109 crore (Rs 5,42,499 crore – Rs 5,16,390 crore). This means an average fiscal deficit of Rs 8,703 crore per month, which is a whopping 85% lower than the average fiscal deficit per month that the government has run between April and December 2013.
One way of controlling the fiscal deficit is slashing expenditure. This is not very easy to do given that salaries need to be paid, employee provident fund needs to be deposited, interest on government debt needs to be paid and the government debt maturing needs to be repaid.
But one trick that the finance ministry has come up with on this front is to postpone a lot of payments to the next financial year. An article in the Business Standard estimates that subsidies of around Rs 1,23,000 crore will be postponed to the next financial year. These are subsidies on oil, food and fertilizer which should have been paid up by the government in this financial year, but will be postponed to the next financial year. The article points out that the government will need Rs 1,45,000 crore to pay up all the subsidies but is likely to sanction only around Rs 22,000 crore. This leaves a gap of Rs 1,23,000 crore which will be postponed to the next financial year, and will become a huge headache for the next government.
This essentially means that the government will not recognise expenditure when it incurs it, but only when it pays for that expenditure. This goes against the basic accounting principles, where an expenditure needs to be recognised during the period it is incurred. If a private company where to do such a thing it would be accused of fraud. Interestingly, even last year a lot of subsidy payments had been postponed. The American company Enron used this strategy for years to over- declare profits. It used to recognise revenue expected from the future years without recognising the expenditure expected against that revenue, and thus over-declare its profit.
That’s how things stack up for the government on the expenditure side. On the income side, the government is indulging in massive asset stripping. Since January 2014, public sector banks have announced interim dividends of Rs 27,474.4 crore. Now what is the logic here? Earlier this year, the government had put in Rs 14,000 crore of fresh capital in these banks. So, the government gives ‘x’ rupees to public sector banks and then takes away 2’x’ rupees from them.
Then there is the very interesting case of the Oil India Ltd and ONGC buying shares in Indian Oil Corporation worth Rs 5,000 crore, a company which is expected to lose around Rs 75,000 crore this year. Hence, no investor in his right mind would have bought stock in this company.
Given that all these companies are owned by the government, this is essentially a complicated manoeuvre of moving cash from the books of these companies to the books of the government. The next time any UPA politician talks about corporate governance, the example of IOC should be brought to his notice.
And then there is Coal India Ltd. The world’s largest coal producer declared a record dividend in January. This dividend aggregated to Rs 18,317.5 crore. Of this, the government will get Rs 16,485 crore, given that it owns 90% of the company. The government will also get Rs 3,100 crore, which Coal India will have to pay as dividend distribution tax. This money should actually have been used by Coal India to develop more coal mines so that India does not have to import coal, like it currently does, despite having massive coal reserves. But that of course, hasn’t happened.
Also, there is another basic issue here. The sale of assets from the balance sheet to meet current expenditure is not a great practice to follow, given that assets once sold cannot be re-sold, but the expenditure will have to be incurred every year. Asset sales cannot be a permanent source of revenue.
The UPA government has brought India to a brink of a financial disaster. The next government which will take over after the Lok Sabha elections later this year, will have a huge financial hole to fill. As the old Hindi film dialogue goes “hum to doobenge sanam, tumko bhi le doobenge (I will drown for sure, but I will ensure that you drown as well).” The UPA clearly has worked along those lines.
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Chidambaram has got a Rs 2,22,000 cr problem

P-CHIDAMBARAMVivek Kaul 

The finance minister P Chidambaram has got a Rs 2,22,000 crore problem.
And he needs to tackle it before the current financial year ends on March 31, 2014.
In fact, the truth be told, by now he should have already started battling it, that is, if he hopes to successfully tackle it, as he has claimed on numerous previous occasions. 
The Controller General of Accounts, a part of the finance ministry, declares fiscal deficit data every month. Fiscal deficit is the difference between what a government earns and what it spends. 
Between April and November 2013, the first eight months of the financial year, the fiscal deficit stood at Rs 5,09,557 crore. This works out to be at 93.9% of the annual target. The fiscal deficit target set at the beginning of the year was Rs 5,42,499 crore. 
If this target has to be met then the government cannot run a fiscal deficit of greater than Rs 32,942 crore( Rs 5,42, 499 crore minus Rs 5,09,557 crore) between December 2013 and March 31, 2014. This means the government can run an average fiscal deficit of around Rs 8,235 crore per month (Rs 32,942 crore/4) during that period.
And this is where the problem starts. Between April and November 2013, the government ran a fiscal deficit of Rs 5,09,557 crore or around Rs 63,695 crore (Rs 5,09,557 crore/8) on an average per month. If the fiscal deficit target has to be met the fiscal deficit of Rs 63,695 crore per month needs to be brought down to Rs 8,235 crore per month. 
This implies a gap of Rs 55,460 crore per month or Rs 2,21,840 crore (Rs 55,640 crore x 4) over a period of four months. And this is what I called Chidambaram’s Rs 2,22,000 crore. 
To put things in perspective the average fiscal deficit of Rs 63,695 crore that the government has run in the first eight months of the year is 7.7 times the fiscal deficit of Rs 8,235 crore that it needs to run over the period of December 2013 to March 2014, in order to meet the target. 
Chidambaram has asserted time and again that the fiscal deficit target is a ‘red line’ that will not be crossed. So how will he ensure that the government does not cross the red line? One way is to hope and pray that the government earns what it had targeted at the beginning of the year. 
The receipts(or what the government hopes to earn) targeted for the year are Rs 11,22,799 crore. Of this only Rs 5,11,638 crore has been earned during the first eight months of the year. Hence, the government hopes to earn Rs 6,11,161 crore between December 2013 and March 2014. 
The government earnings tend to be back-ended, that is, a lot of money comes into its coffers during the last few months of the year. But even after taking that factor into account the situation doesn’t look good.
Tax collections form nearly four fifths of the government’s earnings. And things clearly look slow on this front. During the period April to November 2013, the government has managed to collect around 44.8% of its annual target. During the same period last year the number was at 47.9% of the annual tax target.
The average tax collected for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 48.92% of the annual target. This clearly tells us that the tax collections have been slow this year. 
Also, the only year since 1997-98, when the tax collections during the first eight months have been lower than the current year was 2001-2002. During that year, the number had stood at 40.8% of the annual target. 
A sluggish economy is the best explanation for lower than usual tax collections. In fact, a report in The Economic Times suggests that “indirect tax estimates may have to be revised downwards by at least Rs 30,000-35,000 crore from the budget estimate of Rs 5.65 lakh crore.” Given this, the government is most likely to miss its tax collection target. 
Hence, the only way the government can hope to meet its fiscal deficit target is by cutting expenditure. One way of doing this is by delaying payments. News reports suggest that around Rs 85,000 crore that needed to be paid to oil marketing companies and fertilizer companies to compensate them for oil and fertilizer subsidies, will be postponed to next year. 
The government also seems to be delaying tax refunds. “Exporters are unlikely to get any more duty refunds for the rest of the year as field officials look to maximise revenues in the remaining three months of FY14,” The Economic Times report referred to earlier points out. 
Another report published in The Economic Times points out “The government’s zealousness in squeezing expenditure to meet the fiscal deficit target, either by delaying payments or not awarding new contracts, may be hurting those most vulnerable to such tightening — small and micro enterprises, self-employed professionals and the retail trade.” 
Further, the government expenditure is categorised into two kinds—planned and non planned. On the expenditure side, the cut is more likely to be on the planned expenditure side than non -planned expenditure.
Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government can at best delay paying subsidies. 
Hence, when expenditure needs to be cut, it is the asset creating planned expenditure which typically faces the axe and that is not good for the overall economy. If one looks at the numbers that is the direction they point towards. Between April and November 2013, the non planned expenditure of the government stood at Rs 7,30,203 crore or 65.8% of the annual target. 
Common sense tells us that if the expenditure is spread across evenly all through the year, in eight months the government would have spent around two thirds (or around 67%) of the target. And this is what it has done. This is not surprising given that non-plan expenditure is largely regular expenditure. 
As far as planned expenditure goes, during the first eight months of the financial year only Rs 2,90,992 crore or 52.4% of the annual target of Rs 5,55,322 crore, has been s
pent. This means for the period December 2013 to March 2014, Rs 2,64,330 crore of planned expenditure still needs to be made. And this is where the expenditure cuts will come in, if the government wants to meet its fiscal deficit target.
Planned expenditure is of the asset creating variety and is good for economic growth. When planned expenditure is cut, it hurts economic growth. But the choice is between the devil and deep sea. If the fiscal deficit target is breached, then international rating agencies will downgrade India to junk status. And that will create its own share of problems.  

The article originally appeared on www.firstpost.com on January 4, 2014

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

In 2013, the UPA govt spent twice of what it earned

indian rupeesVivek Kaul

At the end of every month, the Controller General of Accounts (CGA), a part of the finance ministry puts out the fiscal deficit data. Fiscal deficit is the difference between what a government earns and what it spends. 
The latest data put out by CGA on December 31, 2013, throws up some very interesting numbers. For the period April to November 2013, the government of India earned Rs 5,11,638 crore. During the same period it spent Rs 10,21,195 crore. This meant that it ran a fiscal deficit of Rs 5,09,557 crore. 
Thus, the fiscal deficit for the first eight months of the financial year 2013-2014 (i.e. the period between April 1, 2013 and March 31, 2014) was nearly 99.6% (Rs 5,09,557 crore expressed as a % of Rs 5,11, 638 crore) of the total income of the government. In simple English, what this means is that the Congress led UPA government spent twice of what it earned, during the period.
As Franklin Roosevelt, the President of America between 1933 and 1945, put it, “Any government, like any family, can, for a year, spend a little more than it earns. But you know and I know that a continuation of that habit means the poorhouse.”
Of course, the Congress led UPA government clearly does not think so. The fiscal deficit target set at the beginning of the financial year was Rs 5,42,999 crore. During the period April to November 2013, the fiscal deficit, as mentioned earlier stood at Rs 5,09,557 crore. This works out to be at 93.9% of the annual target.
The average fiscal deficit for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 72.37% of the annual target. This clearly tells us that the fiscal deficit number this year is an anomaly. It is much higher than it usually is. The fiscal deficit for the first eight months of 2012-2013 had stood at 80.4% of the annual target. The only year since 1997-98, when the fiscal deficit during the first eight months has been higher than the current year was 2008-2009. During that year, the number had stood at 132.4% of the annual target. 
As we know 2008-2009 (or the period between April 1, 2008 and March 31, 2009) was the financial year before the Lok Sabha elections which happened during April-May 2009. The Congress led UPA government had gone a spending spree in order to woo the voters. This had reflected in the fiscal deficit, which came in at Rs 3,36,992 crore. This was much higher than the target of Rs 1,33,287 crore.
The finance minister P Chidambaram has said time and again that that the government won’t cross the red line on the fiscal deficit. “There can be no compromise … on the decision to walk on the path of fiscal prudence and contain the fiscal deficit,” the finance minister had said on December 11, 2013.
The latest set of numbers make it clear that Chidambaram will have a tough time ensuring that the government does not cross the red line. 
What is interesting is that the between April and November 2013, the government spent Rs 10,21,195 crore. The annual target on the expenditure front is Rs 16,65,297 crore. Given this, the government plans to spend Rs 6,44,102 crore in the period of December 2013 and March 31, 2014. The question is where is this money going to come from?
Things look to be slow on the tax collection front. During the period April to November 2013, the government has managed to collect around 44.8% of its annual target. During the same period last year the number was at 47.9% of the annual target. 
The average tax collected for the first eight months of the financial year between 1997-1998 and 2012-2013, the data for which is available online, was at 48.92% of the annual target. This clearly tells us that the tax collections have been slow this year. Also, the only year since 1997-98, when the tax collections during the first eight months have been lower than the current year was 2001-2002. During that year, the number had stood at 40.8% of the annual target. 
Given these reasons, the only way the government can hope to meet its fiscal deficit target is by essentially postponing the recognition of expenditure. What this means is that even though the expenditure will be incurred it will not be accounted for during this financial year. As a recent report in The Economic Times points out “The Centre is…not likely to pay any fertiliser and oil subsidy remaining for this year, amounting to nearly Rs 85,000 crore, which would also then get pushed to next fiscal.” This will be a huge headache for the next government.
Over and above this, the government is likely to go slow on tax refunds. “Going slow on refunds will help inflate collections,” The Economic Times report quoted earlier points out. 
Before the 2008-2009 Lok Sabha election, the Congress led UPA government went on a spending spree. This led to the fiscal deficit more than doubling from a target of around 2.5% of GDP to an actual of 6% of the GDP. 
The temptation might be to repeat that exercise before the 2014 Lok Sabha elections. But the government doesn’t have that have the same kind of flexibility that it had in 2008-2009 because the fiscal deficit target is already high at 4.8% of GDP, unless, of course, it chooses to take the country towards economic disaster. 
Funnier things have happened whenever bad politics has triumphed over good economics. 

The article originally appeared on www.firstpost.com on January 2, 2014

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