{"id":923,"date":"2012-09-17T11:35:48","date_gmt":"2012-09-17T11:35:48","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=923"},"modified":"2012-09-17T11:35:48","modified_gmt":"2012-09-17T11:35:48","slug":"how-manmohans-omelette-came-out-as-scrambled-egg","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/09\/17\/how-manmohans-omelette-came-out-as-scrambled-egg\/","title":{"rendered":"How Manmohan\u2019s omelette came out as scrambled egg"},"content":{"rendered":"

\"\"<\/a>
\nVivek Kaul
\nAround half way through Manu Joseph\u2019s new book\u00a0The Illicit Happiness of Other People,\u00a0<\/em>Ousep Chacko, one of the main characters in the book, says \u201cDon\u2019t 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.\u201d
\n<\/em>I just couldn\u2019t 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\u00a0bhurji\u00a0<\/em>(the closest Indian representation of scrambled eggs and with due apologies to all the vegetarians out there).
\nWhen 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:\u00a0http:\/\/www.tradingeconomics.com\/india\/inflation-cpi<\/a>) in May 2004. Interest rates were low.
\nThe 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.
\nThe 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.\u00a0\u00a0Thus the primary deficit or the difference between expenditure and income, after leaving out the interest payments, came to just 0.3% of the GDP.
\nWhat 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.
\nThe subsidy bill for the year stood at Rs 43,516 crore or a little over 9% of the total government expenditure.
\nCut 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.
\nEven these numbers, as I showed in a recent piece will turn out to be way off the mark. (You can read the piece\u00a0here<\/a>). As economist Shankar Acharya wrote in the\u00a0Business Standard<\/em>\u00a0\u201cA\u00a0few days back the Controller General of Accounts (CGA, not CAG!) informed us that the central government\u2019s fiscal deficit for the first four months of 2012-13 had already exceeded half of the Budget\u2019s target for the full year.\u201d
\nThe 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\u2019t been experienced since 1990-91, just before India liberalised and opened up the economy.
\nIn his speech as the Finance Minister of India in July 1991 Manmohan Singh had said \u201cThe crisis of the fiscal system is a cause for serious concern. The fiscal deficit of the Central Government\u2026is 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.\u201d
\nSo 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.
\nThe 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.
\nThe 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.
\nJust this will push up the subsidy bill close to Rs 3,00,000 crore.\u00a0\u00a0The government is expected to cross the budgeted amount for food and fertiliser subsidy as well. All in all it\u2019s 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.
\nThe 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\u00a0The Indian Express\u00a0<\/em>\u201cAnyone 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.\u201d
\nThe 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.
\nAlso 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.
\nAlso 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 \u201cImplicit 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.\u201d
\nSlow 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.
\nA 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.
\nWhile these scams were happening all around him, Manmohan Singh chose to look the other way. As TN Ninan wrote in the\u00a0Business Standard<\/em>\u00a0\u201cCorruption 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\u2019s fatal flaw \u2014 his willingness to tolerate corruption all around him while keeping his own hands clean \u2014 has led us into a cul de sac , with the country able to neither tolerate rampant corruption nor root it out.\u201d
\nSingh 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\u00a0Breakout Nations\u00a0<\/em>\u201cIf 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\u2019s economic boom.\u201d
\nHigher expenditure also means inflation will continue to remain high. \u201cNREGA pushed rural wage inflation up to 15% in 2011,\u201d writes Sharma. The fear of high inflation continues, despite the reforms announced by the government. \u201cThe 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,\u201d 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.
\nThe 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\u00a0Economic Times\u00a0<\/em>\u201cSince 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\u2019t know whether it will be run over or cross the road and lay an egg.\u201d
\nAnd even if eggs are laid, we might still not end up with burnt\u00a0bhurji\u00a0<\/em>rather than omelettes.
\n(The article originally appeared on www.firstpost.com.\u00a0http:\/\/www.firstpost.com\/politics\/how-manmohans-omelette-came-out-as-scrambled-egg-458242.html<\/a>)
\n
\n(Vivek Kaul is a writer. He can be reached at\u00a0<\/em>vivek.kaul@gmail.com<\/em><\/a>)<\/em>
\n 
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul Around half way through Manu Joseph\u2019s new book\u00a0The Illicit Happiness of Other People,\u00a0Ousep Chacko, one of the main characters in the book, says \u201cDon\u2019t 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.\u201d I just … <\/p>\n

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