{"id":931,"date":"2012-09-20T10:33:56","date_gmt":"2012-09-20T10:33:56","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=931"},"modified":"2012-09-20T10:33:56","modified_gmt":"2012-09-20T10:33:56","slug":"sonianomics-will-put-india-on-the-path-to-disaster","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2012\/09\/20\/sonianomics-will-put-india-on-the-path-to-disaster\/","title":{"rendered":"Sonianomics will put India on the path to disaster"},"content":{"rendered":"

 
\n\"\"<\/a>Vivek Kaul<\/strong>
\nSonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. \u201cMaine kaha tha, Mamata nahi manegi<\/em>(I had told you Mamata will not agree),\u201d she must be telling the Prime Minister Manmohan Singh these days. \u201cPar aap zidd par add gaye<\/em>(But you became rather obstinate about the entire thing),\u201d she must have added.
\nWhether this government survives or not remains to be seen but economic reforms will now be put on the backburner, that\u2019s for sure. Also, the Congress party led United Progressive Alliance(UPA) will start preparing for elections (early or not that doesn\u2019t really matter). And given that Sonia Gandhi\u2019s form of \u201cgiveaway everything for free\u201d economics will come to the forefront again now.
\nThe 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\u00a0The Idea of India<\/em>\u00a0\u201cThe 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<\/em>.\u201d
\nWhen someone is responsible for everything, the way it usually turns out is that he is not responsible for anything. \u00a0A 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.
\nThis is going to increase in the days to come with Sonia Gandhi\u2019s 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.
\nThese are populist giveaways which have existed all through history. As Gurucharan Das writes in his new book\u00a0India Grows at Night\u00a0<\/em>\u201cPopulist 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 \u2013 they called it \u2018bread and circuses<\/em>.\u2019\u201d
\nBut 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? \u00a0As P J O\u2019Rourke, an American political satirist, writes in\u00a0Don\u2019t Vote! It Just Encourages the Bastards<\/em>\u00a0\u201cWe\u2019re giving until it hurts. That is, we\u2019re giving until it hurts other people, since we\u2019re giving more than we\u2019ve got.\u201d\u00a0<\/em>
\nThe 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).<\/p>\n\n\n\n\n\n\n\n
Subsides<\/td>\nApr-July 2012<\/td>\nApr-July 2011<\/td>\nIncrease over last year<\/td>\nbudget estimate<\/td>\n% of budget estimate<\/td>\n<\/tr>\n
Oil<\/td>\n\n

28,630<\/p>\n<\/td>\n

\n

20760<\/p>\n<\/td>\n

\n

37.91%<\/p>\n<\/td>\n

\n

43580<\/p>\n<\/td>\n

\n

65.70%<\/p>\n<\/td>\n<\/tr>\n

Fertilizer<\/td>\n\n

32220<\/p>\n<\/td>\n

\n

19250<\/p>\n<\/td>\n

\n

67.38%<\/p>\n<\/td>\n

\n

60974<\/p>\n<\/td>\n

\n

52.84%<\/p>\n<\/td>\n<\/tr>\n

Food<\/td>\n\n

46400<\/p>\n<\/td>\n

\n

37540<\/p>\n<\/td>\n

\n

23.60%<\/p>\n<\/td>\n

\n

75000<\/p>\n<\/td>\n

\n

61.87%<\/p>\n<\/td>\n<\/tr>\n

Source: Controller General of Accounts, Deutsche Bank.\u00a0In rupees crore<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

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.
\nAs 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\u00a0here<\/a>). 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.
\nBut that\u2019s 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.
\nGreece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women.\u00a0\u201cAs 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\u2026<\/em>\u201d write John Mauldin and Jonathan Tepper write in\u00a0Endgame \u2013 The End of the Debt Supercycle and How it Changes Everything<\/em>.
\nBut the Western democracies became welfare states only after almost 100 years of economic growth. \u201cWestern democracies had taken more than a hundred years of economic growth and capacity building to achieve the welfare state<\/em>,\u201d writes Das. And given this India is indulging in \u201cpremature welfarism\u201d. \u201cA nation with a per capita income of $1500 cannot protect its people from life\u2019s 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<\/em>,\u201d adds Das.
\nThat\u2019s 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.
\nThere 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.\u00a0 India is making the same mistakes now that Brazil did in the late 1970s.
\nAs Ruchir Sharma writes in\u00a0Breakout Nations\u00a0<\/em>\u201cInspired 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\u2019s economic boom\u2026the 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<\/em>.\u201d
\nInflation 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.
\nAs far inflation is concerned things have already started heating up in India. As Das writes \u201cThe 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<\/em>.\u201d
\nOther 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\u00a0Economic Times\u00a0<\/em>\u201cMost 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.<\/em>\u201d (You can read the compete piece\u00a0here<\/a>). So the farmer has free electricity but then there is no electricity available most of the time.
\nDas writes something similar in\u00a0India Grows at Night.\u00a0<\/em>\u201cPunjab\u2019s politicians gave away free electricity and water to farmers, and destroyed state\u2019s finances as well as the soil (as farmers overpumped water); hence, Haryana supplanted Punjab as the national\u2019s leader in per capita income<\/em>.\u201d
\nOther 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 \u201cBut neither the \u2018do-gooders\u2019 nor the Congress party was deterred by the massive corruption in the supply of diesel, kerosene, electricity and cooking gas as well as in \u2018make work\u2019 schemes and food distribution. Politicians felt there were still plenty of votes there.<\/em>\u201d
\nBut 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.
\nSo 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: \u201cNa samjhoge to mit jaoge ae hindustan waalo, tumhari daastan bhi na hogi daastano main<\/em>\u201d ( \u201cIf you don\u2019t wake up, O Indians, you will be ruined and razed, Your very name shall vanish from the chroniclers\u2019 page\u201d \u2013 Translation by K C Kanda in\u00a0Masterpieces of Patriotic Urdu Poetry: Text, Translation, and Transliteration<\/em>).
\nThe Prime Minister Manmohan Singh\u2019s 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.
\nThe article originally appeared on September 20, 2012 on www.firstpost.com.\u00a0http:\/\/www.firstpost.com\/politics\/sonianomics-will-put-india-on-the-path-to-disaster-462163.html<\/a>
\n(Vivek Kaul is a writer. He can be reached at\u00a0vivek.kaul@gmail.com<\/a>)
\n 
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

  Vivek Kaul Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. \u201cMaine kaha tha, Mamata nahi manegi(I had told you Mamata will not agree),\u201d she must be telling the Prime Minister Manmohan Singh these days. \u201cPar aap zidd par add gaye(But … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,33,59],"tags":[530,531,771,1133,1161,1290,1504,1696,1925,2194,3162,3409,3527,3689],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Analysis<\/a> Firstpost<\/a> Politics<\/a>","qubely_excerpt":"  Vivek Kaul Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. \u201cMaine kaha tha, Mamata nahi manegi(I had told you Mamata will not agree),\u201d she must be telling the Prime Minister Manmohan Singh these days. \u201cPar aap zidd par add gaye(But…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/931"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=931"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/931\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=931"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=931"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=931"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}