Mr Chidambaram, please don’t fudge data to say that Manmohan was better than Modi

Former finance minister P Chidambaram did a smart thing before the last Lok Sabha elections—he decided not to contest. His son Karti Chidambaram contested instead of him, in the Sivaganga constituency in Tamil Nadu. The junior Chidambaram got around 1.04 lakh votes in a five cornered contest and lost his deposit, having not managed to secure more than one-sixth of the votes polled.

Unlike other Congress leaders, the senior Chidambaram has managed to keep himself partly busy, by writing a Sunday column for The Indian Express. In this column, the former finance minister, tries to tell us every week how the ten year rule of the Congress led United Progressive Alliance (UPA) had been good for the country and how the economy has been in trouble since the Narendra Modi government took over.

The latest column is along similar lines. In this column Chidambaram tries telling us that the Congress led UPA government had left the country in a good shape and the Narendra Modi government has screwed up things, since taking over in May last year.

As Chidambaram writes: “Let us look at the hard data that would be relevant to ‘development’ and ‘jobs’. There are more red lights than green. Yet the GDP(Gross Domestic Product) is estimated to have grown at 7.4 per cent in 2014-15, although the RBI has warned of a downward revision.”

Long story short—Chidambaram seems to believe that the GDP may not have grown by 7.4% between April 1, 2014 and March 31, 2015. And honestly, he may be right about it.

The ministry of statistics and programme implementation released the Gross Domestic Product(GDP) number for 2014-2015 on February 9, 2015. A new method was used to calculate the GDP and as per this method, the GDP growth in the financial year 2014-2015 would come in at 7.4%. This was significantly higher than the 5.5% growth that had been forecast by the Reserve Bank of India, earlier.

The trouble is that the real numbers don’t show this economic growth. Car sales grew by a minuscule 3.9% in 2014-2015. Exports contracted by 1.23%. The total indirect tax collections at Rs 5,46,479 crore were 12.5% lower than the original target of Rs 6,24,902 crore. When it comes lending by banks, it grew by 8.6% between March 21, 2014 and March 20, 2015. In comparison, it had grown by 14% between March 22, 2013 and March 21, 2014.

The Economic Survey released by the ministry of finance today towards the end of February 2015 stated: “The stock of stalled projects at the end of December 2014 stood at Rs 8.8 lakh crore or 7 per cent of GDP.” Further, corporate profitability was dull as well in the latter half of the financial year (October 2014 to March 2015).

It is worth remembering that the numbers highlighted above are real numbers, unlike the GDP which is a theoretical construct. The real numbers make it difficult to believe that the economy grew by 7.4% in 2014-2015. And given that Chidambaram is right in saying what he has in his column. Or so it seems.

The interesting bit comes next, where Chidambaram writes: “I predicted that the economy will revive in 2013-14. It did, and when the UPA passed on the baton to the NDA in May 2014, the GDP had recorded a growth rate of 6.9 per cent in 2013-14.”

So, Chidambaram is basically saying that in 2013-2014, when the Congress led UPA government was in power, all was well. The economy grew by 6.9% and the Congress led UPA passed on a healthy economy to the Narendra Modi government.

Now what is wrong with this argument? Several things. First, you don’t need a PhD in Economics (or an MBA from Harvard, which Chidambaram has), to tell you that 7.4% economic growth (which happened in 2014-2015) is higher than the 6.9% economic growth (which happened in 2013-2014).

Secondly, what Chidambaram does not tell us is that the 6.9% number is also a revised number, which has been calculated as per the new GDP method released by the ministry of statistics and programme implementation. The economic growth as per the old method had been at 5%.

So the point is that Chidambaram does not believe the 7.4% economic growth number as per the new model. But he believes the 6.9% economic growth number which is also as per the new model. And therein lies his double standard.

If he believes in the 6.9% number then he has to believe in the 7.4% number as well because the method involved in calculating them is the same. And that being the case, 7.4% is higher than 6.9%.

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

The column originally appeared on Firstpost on May 25, 2015   

Why Rahul Gandhi doesn't really mean what he says

rahul gandhi Vivek Kaul
In an interview to the Tehekla magazine in September 2005, Rahul Gandhi, now the Vice President of the Congress party, is said to have remarked that I could have been prime minister at the age of twenty-five if I wanted to.”
The statement created an uproar. The Congress party immediately jumped to the defence of its princling. Abhishek Manu Singhvi, the then Congress spokesperson, specifically mentioned that Rahul had not said ‘I could have been prime minister at the age of twenty-five if I wanted to’.
Tehakla initially stood by its story but backed down later. “This seems to be a clear case of misunderstanding. Mr Gandhi thought he was having a casual chat whereas our reporter took it to be a proper interview,” the weekly said
in a statement.(The ‘edited’ casual chat can still be read on Tehelka’s website).
On another occasion Gandhi remarked
“Please do not take it as any kind of arrogance, but having seen enough prime ministers in the family…it is not such a big deal. In fact, I often wonder why should you need a post to serve the nation.” (Source: Decoding Rahul Gandhi, Aarthi Ramachandran).
Gandhi’s obsession on clarifying that he is not in the race, seems to have continued. “Asking me whether you want to be prime minister is a wrong question,” he recently told journalists. In fact he even went onto add that he did not want to get married because marriage leads to children and a lust for power. “I feel we should all be detached from power. Only then we can contribute to the society better. You people ask me about my marriage plans. Sometimes, I think, if I marry and have children, I would want my children to take my position,” he said.
The spin doctors of the Congress party have been working overtime to portray this statement of their princling as a great sacrifice. But being married has got no link with running political fiefdoms and lusting for power. As Swaminathan Anklesaria Aiyar writes in
a recent column in The Times of India “Mayawati and Jayalalithaa are both unmarried and without kids, and they run fiefdoms no less feudal than the Congress. Absence of children has never meant decentralisation.” This argument also works for Mamata Banerjee in West Bengal, Naveen Patnaik in Orissa and Narendra Modi in Gujarat, who also run political fiefdoms despite having no children. So the lust for power or politicians running political fiefdoms, has got nothing to do with being married or not.
Also the question is that what can Rahul Gandhi get done as a Prime Minister that he cannot get done being outside the government (assuming that the Congress led UPA continues to be in power)? As Tavleen Singh writes in
a recent column in The Indian Express Rahul already has more power than almost any politician in India other than his mother. So why should he want something he already has?”
Other than wanting to be detached from power, Rahul Gandhi also wants to empower middle-level leaders. “Today, I see how MPs feel without power and it is the same story in all the parties, be it the Congress or the BJP. I want to empower the 720-odd MPs in Parliament. I want to give voice to the middle tier, empower the middle-level leaders,” he said.
While he can’t do anything about the BJP, what is he doing about the Congress? Not much seems to be the answer. The upper ranks of the Congress party seem to be filled with sons/daughters of Congress leaders. In fact, Rahul’s boys, a term I use for the relatively younger leaders in the Congress party supposed to be close to the princling, are all sons of Congress leaders. As Aiyar writes “After talking for years about promoting youth in politics, you have indeed promoted many newcomers to important ministerial positions. They are young by Indian standards, but many have greying hair. The list in New Delhi includes Jyotiraditya Scindia, Sachin Pilot, Milind Deora and Jitin Prasad.”
Nothing seems to have been done about the Congress tradition of the so called “high command” appointing the Chief Minister, in case the party happens to win a state election or even otherwise. This trend was most recently visible in Uttarakhand where the majority of the MLAs wanted Harish Rawat as the Chief Minister, but had to make do with the high command’s choice of Vijay Bahaguna ( who interestingly is the son of the late H N Bahuguna, who was with the Congress party for most of his life). The high command also appointed Prithiviraj Chavan (whose father and mother were both Congress MPs), a political lightweight who was not a member of the state assembly, as the Chief Minister of Maharashtra when they wanted to replace the scam tainted Ashok Chavan (son of SB Chavan, another Congress leader).
The points made above are not exactly rocket science. And I am sure Rahul Gandhi understands them as well as the others. As Tavleen Singh writes in The Indian Express Rahul Gandhi knows this as well as anyone else in politics, and if he wants to change things, then this is terrific. But why does he not get on with it? Why does he not begin by ensuring that next time the Congress party wins elections in some state, the high command is not given the task of choosing the chief minister? Why does he not ensure that next time a parliamentary constituency reports a vacancy, it does not get handed down to an heir?”
Singh in her column writes that as a responsible political pundit she has been mulling over what Rahul Gandhi said, and she remains “puzzled” and “mystified” by it.
This writer believes that there is an answer to what Singh refers to as a mystery and a puzzle. Allow me to explain. The writer Ramachandra Guha told me in an interview late last year that “I think this dynasty (Gandhi) is now on its last legs. Its charisma is fading with every generation.”
This is something that Shekhar Gupta also pointed out in The Indian Express “Ask any Congress leader who contests elections (unlike its star cast of chronic Rajya Sabhaists) and they will admit to you, albeit in whispers and fearfully glancing left and right, that the days when the Gandhi family could win them their seats are over. In the elections, now, it is every man for himself.”
This has been proven in Uttar Pradesh elections and the Bihar elections before that where the Congress party was routed. Rahul Gandhi was closely involved with both the elections. Given this the ability of Rahul Gandhi or for that matter his mother Sonia, to get in the votes for the party, is very limited. They are not in the same league as Jawahar Lal Nehru, Indira Gandhi or even Rajiv Gandhi, before them. Gupta explains it best when he writes “their ability to win seats beyond the Amethi-Rae Bareli enclave has diminished to insignificance.”
It would be foolish to believe that Rahul or Sonia do not understand this. Hence, they need the Scindias and the Deoras and the Pilots and the Prasads, of the world to continue winning elections. The smaller princlings within the party who can continue bringing in the votes from all across the country. The Congress party may be a shadow of what it was in the past, but it continues to remain India’s largest party. And for it to hold onto what it has, it needs to continue with the feudal structure that totally encapsulates it, with the Gandhis at the top.
In fact when the party has tried to get rid of its feudal structure it has had disastrous results. Take the case of Andhra Pradesh. After the death of Y S Rajasekhara Reddy, his son Jagan Mohan, wanted to become the Chief Minister. And that was not allowed. Jagan Mohan left to form his own party and is expected to widely damage the electoral prospects of the Congress party in a state which sends 42 members to the Lok Sabha.
On the flip side, even though the Gandhis are no longer the vote winners they once were, they are still very important to the idea of Congress. As Gupta put it in his column “I asked a senior (and always elected) Congress leader, then why was the Gandhi family still so important and had total sway over the party. He said, surely they cannot help anybody win elections, but they keep the party together. Their word is law and the party needs that discipline. Illustration: the moment Sonia or Rahul says something, everybody nods and falls in line. If Narasimha Rao or Sitaram Kesri said something, everybody broke out in rebellion and rashes.” So even though the Gandhis may not bring in the votes, they do help keep the Congress flock together.
Given this is in nobody’s interest, neither the Congress party, nor Rahul Gandhi (or for that matter his mother Sonia) to disturb the status quo. The Congress needs the Gandhis to survive as a party, and the Gandhis need the seats in the Parliament and the state assemblies to continue to be relevant.
In October 2008, while addressing girl students at a resort near Jim Corbett National Park, Rahul Gandhi referred to “politics” as a closed system in India. “If I had not come from my family, I wouldn’t be here. You can enter the system either through family or friends or money. Without family, friends or money, you cannot enter the system. My father was in politics. My grandmother and great grandfather were in politics. So, it was easy for me to enter politics. This is a problem. I am a symptom of this problem. I want to change it.”
More such statements will be made in the days to come. Meanwhile, the symptom and the problem will continue to co-exist.
The article originally appeared on www.firstpost.com on March 12, 2013 

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

Why Samsung is the new Nokia

samsung
Vivek Kaul

I grew up reading The Indian Express. But a few years back my parents started subscribing to The Times of India after my mother complained once too often that “Express main masala nahi hai!”
The fall of 
The Indian Express along with The Statesman which used to be two very good newspapers (Express still is. And I haven’t read Statesman in a while, though at a point of time it was regarded the best English newspaper in Asia) are nowhere in the reckoning now, as far as the number of readers is concerned.
What happened? To some extent the papers remained stuck to their past glory and did not see the rise of the new Indian middle class, which along with hardcore news also wanted a dash of 
masala every morning. They wanted to know how the Congress party was screwing up the country but they also wanted to know whether Amitabh and Rekha smiled when their eyes met at a film industry party. 
The Times of India 
was the only newspaper which caught on to this trend (or should we say created it), raked in the moolah and got way ahead of almost all its competitors in the race.
So what is the point of I am trying to make? Incumbents who are firmly entrenched in their businesses more often than not fail to see the rise of a new category. The most recent example of the same is Nokia, which after being the top mobile phone brand in the world for a period of nearly 14 years has lost out to Samsung.
And the reason for this is very simple. Nokia did not see the smart phone. There are loads of other examples of existing companies that did not see the rise of a new category.
Sony invented the walkman but allowed Apple to walkway with the MP3 player market. RCA which was big radio manufacturer had earlier allowed Sony to walkaway with the pocket radio market. Southwest Airlines created an entirely new low cost airline market which gradually spread to all other parts of the world. Incumbents like Panam, Delta, Singapore Airlines and British Airways did not spot this opportunity.
In India Hindustan Lever Ltd did not spot the low cost detergent market, Nirma did that. Amabassador and Premier Padmini which were the only two car companies in India did not see the rise of the small car market which Maruti Suzuki captured. More recently Maruti did not spot the growing demand for diesel cars and continued to be primarily a company which manufactured petrol cars. It lost out in the process.
Bharti Beetel, revolutionised the landline phone market in India with the introduction of push button phones. But it got into the mobile phone market very late. And this was a huge business opportunity missed given that Bharti Airtel became the largest mobile phone company in India and could have easily bundled Beetel mobile phones along with Airtel mobile phone connections. An entire first generation of Indian mobile phone users could have ended up using Beetel mobile phones. Kodak a company which invented digital photography went bankrupt recently. And BBC, the most respected news organisation in the world did not see the rise of the concept of 24 hour news and left it to CNN to capture that market.
As marketing consultants Al and Laura Ries,write in 
War In the Boardroom, “The biggest mistake of logical management types is their failure to see the rise of a new category. They seem to believe that categories are firmly fixed and a new one seldom arises.”
And why is that? The answer lies in the fact that incumbent companies are too cued into what they are doing at that point of time. A brilliant example is Kodak. How could a company which invented digital photography go bankrupt because of it? Mark Johnson explains this phenomenon in 
Seizing the White Space – Business Model Innovation for Growth and Renewal. As he writes “In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”
Sasson was asked to keep quiet about his invention. This was because Kodak was the biggest producer of photo films at that point of time. And any invention that did not use photo films would have hit the core business of the company. So Kodak ignored the segment. By the time it realised the importance of the segment other companies like Canon had already jumped in and become big players. Also by then brand Canon had come to be associated very strongly with the digital camera whereas Kodak continued to be associated with the old photo film.
The same would have stood true for Beetel in India. They would have been making good money on selling landline phones and wouldn’t have seen any sense in entering the nascent mobile phone market in India where calls were priced at Rs 16 per minute. And by the time the market took off brands like Nokia would have been firmly entrenched. Amabssador and Premier Padmini fell victim to the same thing.
Another excellent example of this is Xerox. “Just think of Xerox’s Palo Alto Research Center, which famously owned the technologies that helped catapult Apple (the graphical user interface, the mouse), Adobe (post script graphical technology) and 3Com (Ethernet technology) to success,” writes Johnson.
But Xerox executives were busy selling the photocopier. They did not have time for these small tinkerings that seemed to have been happening in their company labs. The photocopiers brought in all the money and their attention was firmly focussed on them.
Sony is a really interesting example in this trend. Sony had created the Walkman and the entire market of listening to music anywhere and everywhere. But they somehow failed to latch onto the MP3 player market which was captured by the likes of Apple iPod. An MP3 player was just an extension of the Walkman.
Other than being an electronics company Sony had also morphed into a music company owning the rights to the music of some of the biggest pop and rockstars. Hence Sony supporting MP3 technology would mean one of the biggest music companies in the world supporting the free copying and distribution of music because that was what MP3 was all about.
And with this logic which might have seemed perfectly fine at that point of time Sony lost out to Apple in the MP3 space. Also, over the years music became free anyway.
Getting back to where we started, Nokia made the same mistake. It did not see the rise of the smart phone category as other players like Samsung and Apple did. And the reason was simple. Even though smart phones have been around for a while only now have they really taken over the market because they are robust enough. Hence, as long as the basic phones of Nokia were selling well, as they were till a couple of years back, it had no real interest in thinking about the smart phone market.
By the time the company caught on with the launch of Lumia other international players like Samsung and Apple already had a major presence in the market. In India the smart phone space has loads of local players like Micromax battling for the market as well.
And so Nokia lost the race!
The interesting thing is that Samsung will also will lose the race when the next evolution in the mobile phone space happens. It will be too focused on the smart phone.
The article originally appeared on www.firstpost.com on December 20, 2012

(Vivek Kaul is a writer. He can be reached at [email protected]

Robert Vadra's Midas touch is based on inside info


Vivek Kaul
Robert Vadra is a lucky man. A very lucky man indeed.
People sell land to him and do not demand money in exchange immediately. This is not money running into a few thousands or a few lakhs, but it’s more than a few crore.
In today’s edition of Business Standard N Sundaresha Subramanian explains how it all started for Vadra. How the son-in-law of the first family of Indian politics got into buying and selling land.
Onkareshwar Properties sold 3.5 acres of land in Shikhopur near Manesar to Vadra’s Sky Light Hospitality sometime in February 2008(as an earlier report in The Hindu suggested). Sky Light Hospitality as on March 31, 2008 had an issued capital of Rs 1 lakh. This was the money Vadra and his mother Maureen (who owned 0.2% of the company) had put into the company for business. The company had not taken any loans.
So the question is how did a company with Rs 1 lakh capital buy 3.5 acres of land? The sale deed for this land showed that it was bought by Sky Light Hospitality for Rs 7.5 crore. So how did a company which had Rs 1 lakh capital buy a piece of land which cost Rs 7.5 crore without taking on any loan?
Sky Light Hospitality’s balance sheet as on March 31, 2008 shows a book overdraft of Rs 7.94 crore in Corporation Bank Friends Colony, New Delhi. This basically means that a cheque was issued without enough funds being available in Sky Light Hospitality’s accounts. The cost of the land was Rs 7.5 crore. With a 6% stamp duty, the total would have worked out to Rs 7.95 crore (Rs 7.5 crore + 6% of Rs 7.5crore). And that is more or less the entry that sits on Vadra’s Sky Light Hospitality.
The question is how can a company issue a cheque without there being enough money in its accounts? This can only happen if the individual/company in whose name the cheque is being issued agrees not to deposit the cheque immediately.
And that’s what precisely seems to have happened in this case. As the Business Standard points out “Onkareshwar’s balance sheet as on March 31, 2008, showed an entry of Rs 7.95 crore under ‘sundry debtors’. This corresponds to the entry of Rs 7.94 crore book overdraft entered in Sky Light’s books.” So what this means is that Onkarshwar sold the land, accepted the cheque, did not deposit it immediately and also paid for the stamp duty in the meanwhile.
Vadra took this land and sold it to DLF sometime in June 2008. DLF valued this land for Rs 58 crore and gave Vadra an advance of Rs 50 crore against it. Vadra basically used this Rs 50 crore to go on a property buying spree in Haryana and Rajasthan. What this also meant was that Vadra bought land for Rs 7.5 crore and sold it for Rs 58 crore. And in the process made a profit of Rs 50.5 crore. All along he had invested only Rs 1 lakh of his own money in the deal.
Vadra got the advance of Rs 50 crore in three installments an earlier story in The Financial Express pointed out. The first of these instalments was paid on June 3, 2008, The Hindu had pointed out. It was this money that Vadra would have used to pay off Onkareshwar Properties. So what this means that Onkareshwar sold the property to Vadra in February 2008 and waited till June 2008 to be paid. That was a very considerate transaction in this day and age where every real estate company wants the money in advance.
A clear link has also started to emerge that the Haryana Chief Minister Bhupinder Singh Hooda may also have had a role to play in facilitating the deal between Onkareshwar and Vadra’s Sky Light Properties.
Satyanand Yajee owns 98% of Onkareshwar Properties. He is the general secretary of the All India Freedom Fighters Organisation (AIFFO), the Business Standard points out. “Satyanand Yajee, who turned Onkareshwar Properties, a company with capital of Rs 1 lakh, into a Rs 136-crore capital base behemoth, isn’t an obscure figure. He is an office bearer of the Delhi-based All India Freedom Fighters Organisation (AIFFO)…Haryana Chief Minister Bhupinder Singh Hooda, too, has strong ties to this organisation. Before his death in 2009, Ranbir Singh, Hooda’s father, was working president of AIFFO. And, Hooda is a founder-member and working president of AIFFO’s sister body, All India Freedom Fighters’ Successors’ Organisation(AIFFSO), according to his profile in the Haryana Vidhan Sabha website,” the paper writes.
And the link doesn’t end there. “Both Hooda and Yajee are sons of freedom fighters. While Satyanand’s father, the late Sheel Bhadra Yajee, hailed from Bihar and was said to be close to Subhash Chandra Bose, Ranbir Singh hailed from Rohtak and was irrigation minister of Punjab when the iconic Bhakra Nangal project was implemented. On a website in honour of Sheel Bhadra Yajee, the chief minister, with his father and son, Deepender Hooda, is quoted showering praises. Recently, AIFFO had spent lakhs of rupees in full-page advertisements praising Ranbir Singh’s contributions to the freedom struggle. ,” the Business Standard points out.
Given this it is not surprising that the Haryana government was in a hurry to give Vadra a clean chit on his property dealings in the state. Vadra’s real estate empire started with more than a little help from Hooda.
A part of the money that Vadra’s Sky Light Hospitality got from DLF was also used to buy plots of lands in Bikaner, as a DNA story reported a few days back. “In a flurry of deals between June 2009 and August 2011, Robert Vadra purchased at least 20 plots of land collectively measuring more than 770 hectares in Rajasthan’s Bikaner district, in a region that would see prices spiraling soon after. A clutch of investors, including Vadra, apparently privy to information on upcoming industrial projects (the Vavasi silicon chip project and the solar parks policy) in the vicinity, reaped huge profits with land values appreciating by up to 40 times since 2009,” the story pointed out.
In fact Vadra was willing to pay Rs 65,000 per hectare of land when the going rate was not more than Rs 30,000 a hectare. As the DNA wrote “Bikaner businessman and land investor Vineet Asopa, who sold among the largest plots to Vadra, was so surprised at the ease with which he demanded and received Rs65,000 a hectare when local prices were no more than Rs30,000 a hectare that he summoned contractors for an overnight survey of whether the land was rich in minerals.They dug 80 feet deep, found only rocky surface, and Asopa went ahead with the deal. He found out only two months later that the purchaser was Vadra, whose signature was on the cheques.”
This would not have happened unless Vadra was privy to information about the industrial projects coming up on the aird land he had been buying up. And this needed more than a little help from the government.
Ashutosh Varshney in a column in The Indian Express equates Vadra’s strategy of buying up land before anyone else does, to an honest graft. He quotes George W Plunkitt, a US state senator in the state of New York, in the late 1800s. “In a famous passage, George W. Plunkitt…said the following: “Everybody is talking these days about Tammany men growing rich on graft, but nobody thinks of drawing the distinction between honest graft and dishonest graft… Yes, many of our men have grown rich in politics. I have myself, but I’ve not gone in for dishonest graft — blackmailing gamblers, saloonkeepers, disorderly people, etc… There’s an honest graft… Let me explain by examples. My party’s in power in the city, and it’s going to undertake a lot of public improvements. Well, I’m tipped off, say, that they’re going to lay out a new park at a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighbourhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particularly for before… Or supposing it’s a new bridge they’re going to build. I get tipped off and I buy as much property as I can that has to be taken for approaches. I sell at my own price later on and drop some more money in the bank… Wouldn’t you?” (William L. Riordan, Plunkitt of Tammany Hall).”
That’s what Vadra is doing as well. His mother in law’s party is in power. He is tipped off about a new project coming up in states the Congress party rules. He just happens to be buy land before anyone else does being privy to information. And once the information is made public the price of the land goes up many times over in the months and years to come, and he sells out. Wouldn’t you, dear reader, be doing the same thing, assuming you were privy to  information like Vadra is?
The article originally appeared on www.firstpost.com on October 27,2012. http://www.firstpost.com/economy/robert-vadras-midas-touch-is-based-on-inside-info-504707.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])