RBI has done what it could to assuage the markets. RBI, as we all know, can only provide direction to interest rate movements but cannot force banks to follow suit. Nor can it force banks to lend more money to any sector. The lowering of the repo and reverse repo rate is a clear signal to banks to reduce rates for industry in particular. The fact that inflation is benign has helped the central bank to take this decision. The focus is evidently on growth, now that the global economy is expected to recover only in 2010; and attaining a growth rate of 6% for India under these circumstances is going to be a challenge.
The credit policy has been geared to provide direction to future monetary activity, and hence deserves to be analysed within the parameters laid down. To begin with RBI has assumed that non-food credit would grow by 20% in this year. Last year, the outstanding credit stood at around Rs 28 lakh crore, which means that incremental credit will be Rs 5.6 lakh crore. Deposits are expected to grow by 18%, which again on a base of around Rs 38 lakh crore means an increase of Rs 6.8 lakh crore in incremental deposits. Of this 5% would be kept aside for CRR, which in turn would make around Rs 6.5 lakh crore available to banks.
The difference between the two would be Rs 0.9 lakh crore, which under normal circumstances would not be an issue for the economy. However, net government borrowing for the year is expected to be Rs 3.1 lakh crore. This leaves behind a gap of Rs 2.2 lakh crore for the year, if things work out this way. Where will this money come from?
RBI has mentioned pushing in around Rs 1.2 lakh crore (which is equivalent to around 3% points cut in the CRR) through unwinding of MSS bonds and OMO purchases, but that will still leave behind a gap of Rs 1 lakh crore. As banks have an investment deposit ratio of over 30%, the sale of bonds to the extent of Rs 70,000 crore should not really matter as it would still mean the maintenance of the SLR of 24%, with the balance being financed through the MSS route. This means that RBI will have to lower the CRR further during the year to provide liquidity, or else be prepared for a higher interest rate regime.
It may be recollected that lower interest rates last year did create a liquidity problem for banks which had to raise their deposit rates in order to garner funds. Growth in deposits this year has been taken to be lower at 18% compared with almost 20% last year. Under these circumstances, it would be difficult to actually think of lowering interest rates during the year.
RBI is, in fact, talking of fairly modest economic growth and has hence posited a credit growth rate of 20% this year. To eschew a liquidity crunch, it has to hope that this number does not materialise or that deposits increase faster. But, intuitively one can see that a lower economic growth rate is associated with a lower savings rate as households, which is the dominant savings group actually diverts its income to consumption, or rather maintenance consumption. This will make it hard to enhance the deposits growth rate.
Another imponderable is the government deficit. One is not quite sure if this number will be maintained and a clear picture will emerge once the new government is in power. This is critical because with the government being against monetisation of the deficit, any further borrowing will only strain the system.
The major concern for industry is the delivery of credit, especially with there being surplus funds of around Rs 1.2 lakh crore in the system today. Prudence will dictate that RBI should try and take use these surplus funds through an accelerated borrowing programme so that the funds do not lie idle with the banks. As this is the slack season when typically there is less pressure on funds, the period post august could be the time when industry could be involved in the credit process.
Therefore, the overall liquidity situation and interest rate movements will require constant monitoring this year as all the three variables: deposits, credit and government borrowing have been projected based on certain assumptions, which could change.
Wednesday, April 22, 2009
It is not Economics: Financial Express: 18th April 2009
There are essentially three sets of parties or groups that are in contention for power in these elections. The Congress-led alliance, BJP-led alliance and what is nebulously called the Third Front. On economic issues, is there a choice for the voter? And how much do we agree with the economic manifestos?
Consider the economic performance of the last two governments. The BJP-led NDA had actually coined the phrase, ‘India shining’, as every possible sector in its perception, was looking up in 2004. Yet, it was voted out of power for a different set of reasons. The Congress-led UPA government has had four successive years of good economic numbers, something which has been repeatedly emphasised on different forums to drive home the view that there has been excellence in this area. Yet, the last year, ie. 2008-09, has been a disappointing one with low growth, high inflation, highest fiscal deficit, high current account deficit, depreciating rupee, low export growth, declining forex reserves and rising external debt.
The rational way to look at this is simply that the government of the day can take only limited credit or blame for economic performance. In general, all governments in the recent past have followed similar economic policies, depending on the circumstances. All of them try and ensure that tax income increases and spending is judicious. All of them try and make credit cheap while trying to protect the common man. Inflation is a concern and always evokes similar responses. Similarly, monsoon failures are not the creation of governments.
Further, issues like loan waivers, higher pay packages for government employees, higher subsidies, etc are standard populist principles followed by most governments across the world. But, being in the opposition, the parties will oppose such measures, but would change their position when in power. The approach to divestment, foreign investment including banking and insurance is actually the same across the board (except the Left parties). The reality is that all governments have to perforce be pursing the goal of liberalisation under the force of globalisation, and only the pace will vary.
Now, election promises also appear to be similar. The BJP, always considered a party of the middle class, has promised tax benefits for interest on bank deposits and has gone back to the famous NTR ‘rice programmes’. The Congress is also on the same plank and talks of similar programmes (each party is trying to.underprice rice). The Congress and BJP are both talking of economic inclusion, which is not really new. But neither has actually focused on measures that make agriculture resilient to weather. Every government makes huge allocations and always shows how the number of kisan credit cards increased, and how much has been spent on irrigation and road development.
This leaves really the Third Front parties. While there is a formal set of parties that constitute this front, there are others like the SP and RJD which could be anywhere. This is a set of parties that have differing economic ideologies. At one end, there is the TDP which is called the party for CII and the IT sector, and, at the other, we have the SP which is out to get rid of English and computers. In between there are the socialist parties which have worked with the capitalist right and also opposed reforms whenever inconvenient. Therefore, the Third Front would pose a conundrum in case it forms the government, though chances of retrogression are minimal.
Hence, it can be said that all parties are, at different levels, actually on the same economic plank. It is not surprising that while each one is trying to score over the other through the interpretation of numbers, they are still falling back on the conventional election tools: religion, caste and hate, which, in retrospect, may prove to be the real determinants of the final outcome.
Consider the economic performance of the last two governments. The BJP-led NDA had actually coined the phrase, ‘India shining’, as every possible sector in its perception, was looking up in 2004. Yet, it was voted out of power for a different set of reasons. The Congress-led UPA government has had four successive years of good economic numbers, something which has been repeatedly emphasised on different forums to drive home the view that there has been excellence in this area. Yet, the last year, ie. 2008-09, has been a disappointing one with low growth, high inflation, highest fiscal deficit, high current account deficit, depreciating rupee, low export growth, declining forex reserves and rising external debt.
The rational way to look at this is simply that the government of the day can take only limited credit or blame for economic performance. In general, all governments in the recent past have followed similar economic policies, depending on the circumstances. All of them try and ensure that tax income increases and spending is judicious. All of them try and make credit cheap while trying to protect the common man. Inflation is a concern and always evokes similar responses. Similarly, monsoon failures are not the creation of governments.
Further, issues like loan waivers, higher pay packages for government employees, higher subsidies, etc are standard populist principles followed by most governments across the world. But, being in the opposition, the parties will oppose such measures, but would change their position when in power. The approach to divestment, foreign investment including banking and insurance is actually the same across the board (except the Left parties). The reality is that all governments have to perforce be pursing the goal of liberalisation under the force of globalisation, and only the pace will vary.
Now, election promises also appear to be similar. The BJP, always considered a party of the middle class, has promised tax benefits for interest on bank deposits and has gone back to the famous NTR ‘rice programmes’. The Congress is also on the same plank and talks of similar programmes (each party is trying to.underprice rice). The Congress and BJP are both talking of economic inclusion, which is not really new. But neither has actually focused on measures that make agriculture resilient to weather. Every government makes huge allocations and always shows how the number of kisan credit cards increased, and how much has been spent on irrigation and road development.
This leaves really the Third Front parties. While there is a formal set of parties that constitute this front, there are others like the SP and RJD which could be anywhere. This is a set of parties that have differing economic ideologies. At one end, there is the TDP which is called the party for CII and the IT sector, and, at the other, we have the SP which is out to get rid of English and computers. In between there are the socialist parties which have worked with the capitalist right and also opposed reforms whenever inconvenient. Therefore, the Third Front would pose a conundrum in case it forms the government, though chances of retrogression are minimal.
Hence, it can be said that all parties are, at different levels, actually on the same economic plank. It is not surprising that while each one is trying to score over the other through the interpretation of numbers, they are still falling back on the conventional election tools: religion, caste and hate, which, in retrospect, may prove to be the real determinants of the final outcome.
Sunday, April 19, 2009
Seven deadly cliches of elections: DNA: 16th April 2009
A close inspection has revealed that there are seven cards that are invariably played every time we move towards the polling booths.
First, the incumbent government extols the economic performance during its term. The UPA has used the Union budget as a propaganda document quite cogently. It is a different matter that coincidentally, the last year of the UPA rule registered the lowest growth with highest inflation (don't be fooled by the near zero WPI number, the CPI is still in double digits), highest fiscal and current account deficit, highest rate of depreciation of the rupee and so on. Ironically the NDA had the best numbers in 2003-04 and yet lost the elections despite the"India Shining" slogan.
The smart politician has told you that India's performance is better than other nations. Besides, the global financial crisis was responsible for these numbers. But the same global upswing did not lead to those good numbers in the first four years. It was the government's policies or rather despite the now infamous wheat mess, telecom muddle, sugar confusion and so on that these achievements were possible. The good numbers are due to them while the bad ones have the foreign hand guiding them.
The second bromide concernsGandhi. Everyone brings back the Mahatma even though his simplicity is in contrast to thewealth of most of our leaders. Today policies have to be capitalist and wealth is their driving force. Yet, we bring back this unknown ideal which is accepted by one and all even though the doctrine is practically defunct today.
Third, the name of Nehru comes in which is synonymous with so-called secularism. Everyone has to be a secularist and all parties talk of secularism and the need to fight communal tendencies even as everyone has his own definition of what the concept is. The BJP on the other hand talks of pseudo-secularism which they say is the brand followed by the other parties which hold different standards for Islam and Hinduism. The BJP's moderates are those who are still apologetic of Ayodhya.
While communalism could invite the wrath of the courts, the same does not apply to casteism, the fourth card played by all parties. We have a right to appeal to your caste, especially if it is a lower one. At this time, everyone is with the Dalit.
Ironically, Mayawati will project Brahmin heavyweights as if to say that she has no prejudices. In rural India, it is always candidates with the same caste that are pitted against each other.
The fifth card relates to the series of alignments that take place. One never knows which parties are aligned with the BJP or the Congress. Lalu Yadav, Mulayam Singh Yadav, Naveen Patnaik, Jayalalithaa, Karunanadhi, Omar Abdullah, Ajit Singh, Deve Gowda, Chandrababu Naidu were at some time with the BJP and then with Congress and then with someone else. At times they do not want a foreign PM, and on other occasions she is Mother India.
The sixth card is for the ubiquitous third front -- a group of opportunistic parties which can ensure that no one gets a majority. Individually they stand for anti-industrialisation (communist), pro-industry (TDP) and statue-building (Mayawati). They will then join the government on 'issue- based' grounds. Alternatively, they will stay out and threaten to pull the rug. The CPI and CPM have high nuisance value and should not be aligning with either the BJP or the Congress because their ideals are different. But for the sake of stability they help form a government and then dangle the proverbial sword of Damocles.
Lastly, all parties try and lure voters. While cash and saris is disallowed, promises to reduce taxes are allowed. Soall parties appeal to the middle class with these sops as they are above religion and caste. The shuffle of these cards will tell us which way the tide will go but to see the full hand you have to wait till May 16.
First, the incumbent government extols the economic performance during its term. The UPA has used the Union budget as a propaganda document quite cogently. It is a different matter that coincidentally, the last year of the UPA rule registered the lowest growth with highest inflation (don't be fooled by the near zero WPI number, the CPI is still in double digits), highest fiscal and current account deficit, highest rate of depreciation of the rupee and so on. Ironically the NDA had the best numbers in 2003-04 and yet lost the elections despite the"India Shining" slogan.
The smart politician has told you that India's performance is better than other nations. Besides, the global financial crisis was responsible for these numbers. But the same global upswing did not lead to those good numbers in the first four years. It was the government's policies or rather despite the now infamous wheat mess, telecom muddle, sugar confusion and so on that these achievements were possible. The good numbers are due to them while the bad ones have the foreign hand guiding them.
The second bromide concernsGandhi. Everyone brings back the Mahatma even though his simplicity is in contrast to thewealth of most of our leaders. Today policies have to be capitalist and wealth is their driving force. Yet, we bring back this unknown ideal which is accepted by one and all even though the doctrine is practically defunct today.
Third, the name of Nehru comes in which is synonymous with so-called secularism. Everyone has to be a secularist and all parties talk of secularism and the need to fight communal tendencies even as everyone has his own definition of what the concept is. The BJP on the other hand talks of pseudo-secularism which they say is the brand followed by the other parties which hold different standards for Islam and Hinduism. The BJP's moderates are those who are still apologetic of Ayodhya.
While communalism could invite the wrath of the courts, the same does not apply to casteism, the fourth card played by all parties. We have a right to appeal to your caste, especially if it is a lower one. At this time, everyone is with the Dalit.
Ironically, Mayawati will project Brahmin heavyweights as if to say that she has no prejudices. In rural India, it is always candidates with the same caste that are pitted against each other.
The fifth card relates to the series of alignments that take place. One never knows which parties are aligned with the BJP or the Congress. Lalu Yadav, Mulayam Singh Yadav, Naveen Patnaik, Jayalalithaa, Karunanadhi, Omar Abdullah, Ajit Singh, Deve Gowda, Chandrababu Naidu were at some time with the BJP and then with Congress and then with someone else. At times they do not want a foreign PM, and on other occasions she is Mother India.
The sixth card is for the ubiquitous third front -- a group of opportunistic parties which can ensure that no one gets a majority. Individually they stand for anti-industrialisation (communist), pro-industry (TDP) and statue-building (Mayawati). They will then join the government on 'issue- based' grounds. Alternatively, they will stay out and threaten to pull the rug. The CPI and CPM have high nuisance value and should not be aligning with either the BJP or the Congress because their ideals are different. But for the sake of stability they help form a government and then dangle the proverbial sword of Damocles.
Lastly, all parties try and lure voters. While cash and saris is disallowed, promises to reduce taxes are allowed. Soall parties appeal to the middle class with these sops as they are above religion and caste. The shuffle of these cards will tell us which way the tide will go but to see the full hand you have to wait till May 16.
Monday, April 13, 2009
Surpluses run the risk of quality deterioration: Economic Times: Faceoff, 8th April, 2009
To address this question, three issues need to be kept in the background. The first is that agricultural production follows a cyclical pattern, with amplitude of just a year. The second is that while we normally refer to food, the allusion is to rice and wheat; we forget an important component of our food basket, i.e., pulses, where there is a perennial shortage. The third is that food policy has to be viewed, whether we like it or not, as working within certain objectives like ensuring fair price and income to farmers (procurement and MSP), protecting consumer through assured supplies and bearable prices (PDS), holding on to strategic buffer stocks and the maintenance of a cropping pattern with respect to wheat and rice. Hence, procurement cannot be closed ended nor can MSP be lowered.
Surpluses should be welcome anytime as anything in large quantities cannot be bad. But, surplus food entails a cost, cannot be supported by existing storage facilities and runs the risk of deterioration in quality especially if we have successive years of surpluses.
Now, given that surpluses do arise, the solution is in developing a framework to optimise the handling of these stocks. Firstly, we need to strengthen the warehousing facilities; and the private sector can be involved here. Secondly, the surpluses should be stored in deficit states to avoid the pitfalls of transportation in times of shortage. Thirdly, surpluses should be a part of the government’s foreign trade policy where the surplus grains are exported. Fourthly, surpluses should be aggressively distributed through the food for work programmes. Fifthly, futures trading should be encouraged where the storing authority manages to hedge the price risk. The ban on futures trading needs to be reviewed. Sixthly, stocks beyond the maximum tolerable limits should be given as aid to the poorer nations. Lastly, the private sector can complement the FCI’s efforts in handling procurement and buffer stocks which can reduce the burden on the exchequer.
Simultaneously, the MSP system needs to be revisited wherein farmers should be encouraged to migrate partly to growing pulses which will balance the cropping pattern at the macro level.
Surpluses should be welcome anytime as anything in large quantities cannot be bad. But, surplus food entails a cost, cannot be supported by existing storage facilities and runs the risk of deterioration in quality especially if we have successive years of surpluses.
Now, given that surpluses do arise, the solution is in developing a framework to optimise the handling of these stocks. Firstly, we need to strengthen the warehousing facilities; and the private sector can be involved here. Secondly, the surpluses should be stored in deficit states to avoid the pitfalls of transportation in times of shortage. Thirdly, surpluses should be a part of the government’s foreign trade policy where the surplus grains are exported. Fourthly, surpluses should be aggressively distributed through the food for work programmes. Fifthly, futures trading should be encouraged where the storing authority manages to hedge the price risk. The ban on futures trading needs to be reviewed. Sixthly, stocks beyond the maximum tolerable limits should be given as aid to the poorer nations. Lastly, the private sector can complement the FCI’s efforts in handling procurement and buffer stocks which can reduce the burden on the exchequer.
Simultaneously, the MSP system needs to be revisited wherein farmers should be encouraged to migrate partly to growing pulses which will balance the cropping pattern at the macro level.
Tuesday, March 24, 2009
Smoke and numbers: DNA 23rd March 2009
Wholesale Price Index (WPI) inflation has come down to less than half a per cent, and next week it could be even lower or negative. Hurrah! Inflation has been conquered finally and the talk doing the rounds is that there is deflation today as prices are falling. This should bring a smile to your lips, but instead there is a grimace when you go to the market place as your grocery bags get lighter.What is the true picture?The word deflation now dominates our vision and pre-empts our ears especially so as people are talking of a recession. There is evidently a conceptual issue here. Deflation is a concept when all or most prices are crashing and not when some prices are falling, which is the case today. What are we trying to say here? Basically, the inflation rate that is flashed at noon time on all working Thursdays is the WPI which compares the index number with that exactly 52 weeks back, which is a point to point comparison. The WPI consists of a large number of products which have been assigned weights based on their importance. Intuitively you can see that if one set of products with a good enough weights registers a fall, then the index will reflect the same. The question you need to ask is whether these products with declining prices are really pertinent to you.The products that are falling or are rising moderately are transport equipment, metals, rubber, chemicals, minerals and fibres which you and I do not encounter in our lives. Fuel is the only product which affects our lives which is declining. The ones which affect us such as food and textile items are rising. Therefore, we face this contradiction in the market place.WPI is actually reflective of producer prices and does not talk of consumer prices, for which there are different indices called the Consumer Price Indices (CPI). The CPI comes in different variants as it captures the consumption baskets of different kinds of workers. If you are an industrial worker, the CPI inflation would be 10.4 per cent (up to January) while it would be 11.6 per cent if you are a farm worker. The former is used in all organised settings where dearness allowance is marked against prices. These indices give a weight of over 50 per cent to food items and also include transport and rent which does not enter the WPI basket.However, it has become a tradition today for us to fall back on the WPI because it is weekly as against CPI which is monthly. This number is used for all policy formulation, which is why it is tracked quite assiduously. The Budget talks about it and so does the RBI. Governments talk about this number because it is almost always lower than the CPI, and hence is a more convenient number. In the west, inflation is always related to the CPI and never producer prices.So, what are the takeaways from this understanding of inflation or deflation? The first is that we are not in a state of deflation, andthe use of this term is iced more with hype and propaganda. If you are a producer, you are confronting lower prices which are good as it helps to enhance sales, profits which will please the shareholders. If you are a consumer; you should not really feel elated by these rosy numbers as the harsh reality in the market place is different.As a policy framer, like the RBI lower WPI inflation means that it is time to lower interest rates, which they are relentlessly trying to do. The concept of real interest rate comes in here which is defined as interest rate minus inflation. If inflation is close to zero, then the nominal or absolute rate must come down to maintain constant real rates. Hence, if inflation is 8 per cent and the lending rate say 12 per cent, the real lending rate would be 4 per cent. Now, with inflation being at zero, the lending rate must come down towards 4 per cent!Therefore, borrowers are to be encouraged with lower lending rates and industry is savouring this thought. Notice how banksare luring customers with attractive home schemes where coincidentally for other reasons, property prices are on the decline.But, the same also means that the saver, especially those dependentonfixed income as well asretired folks will fume because lower deposit rates on grounds of low real interest rates is 'rubbish' to them as they are still paying higher prices in the market for their daily purchases with their incomebeing eroded. Politicians, it is said, always have the last word, and this negative number comes at a time when the economy is putting up a mediocre performance. The common man does not understand GDP or financial crisis, but knows prices. Negative inflation or deflation -- call it what you may, is a potential winner on the pulpit, which will ultimately matter.
Sunday, March 22, 2009
Election Economics: DNA 12th March 2009
Recession and inflation are seen as vulgar words at the time of elections. That is because the man on the street may not understand globalisation or meltdowns, but grasps loss of jobs and higher prices quite quickly. Therefore, the government has tried its best to prop up the economy in every which way, alternating between monetary policy measures such as lowering of interest rates and fiscal impulses in the form of tax cuts and higher expenditure outlays.While all alternatives have been explored, a major big-bang stimulus is on the anvil, albeit quite inadvertently. It is not a result of any conscious Keynesian policy of pump priming but from the big grand process of elections. This is over and above the various populist schemes which have been announced by government in the past keeping the elections in mind. In fact, this is significant because once the elections are announced the government cannot introduce new schemes which can be seen as measures to invite a more favourable voting pattern. But, the process by itself has the ability to provide an additional dose of the booster that has been spoken of by the government.The 15th Lok Sabha election has tremendous potential to provide the impetus to the economy because it involves the cycling of a large amount of funds. It provides employment to a lot many people and in the normal course allows for strong backward linkages for a number of industries especially at the small scale level, which is beneficial to a larger section of blue collared labour. More importantly, all the outlays are instantaneous and do not involve any time lags.
Let us look at the outlays involved. Based on what the EC has mentioned as well as the numbers of the earlier elections, there would be at least 5500 candidates in the fray who can officially spend up to Rs25 lakh each, amounting to Rs1350 crore. The number would only move upwards as more candidates enter the fray. There would be 8 lakh voting booths across the country. These booths would be in schools/panchayat offices, town halls with the paraphernalia of shamianas being erected. They have to be rented out for this time period which at an average cost of Rs10,000 per booth would add another Rs800 crore. This cost would be higher actually as the space has to be blocked for more than the day of the elections.There would be over 13 lakh EVM (electronic voting machines) used, which though already purchased would have to be serviced with batteries being changed and transported across the country, which at an average cost of Rs5000 would mean an expense of Rs650 cr. The EC also recorded that there would be around 40 lakh officials as well as 21 lakh security personnel who would be deployed. Each of these personnel has to be ferried, housed and looked after for more than 3 days around the elections which are spread around over 30 days. A conservative expense of Rs5,000 per head, would add another Rs3000 cr. It's a conservative estimate.Add to this the money spent by individual parties (there were 220 such outfits in the last Election), which could cross Rs1500 crore. The Congress and BJP are expected to spend at least Rs 1000 crore between themselves. Further, there would be vast sums of money paid to get votes, which is pertinent especially in UP and Bihar, and now more prominently in the southern states of AP, TN and Karnataka. This amount has been estimated to be Rs 2500 crore.Now, if we add up these numbers, the total direct cost would come close to Rs10,000 crore, which is probably more than what was spent on the recent US presidential elections. One may take umbrage to this amount being spent, but there is need to reflect over the implications. This number is equivalent to the infrastructure announcements made by the government or the tax cuts given to various industries or the loan waivers announced earlier. It covers the entire country, and more importantly provides additional purchasing power to several classes.Most of this expenditure is on consumption and is instantaneous. Further, this money provides succour to industries such as transport operators (trucks, tempos, autorickshaws, taxis), paper, ink, tent houses, artists, roadside food stalls, diesel/petrol dealers, advertising agencies etc. It provides employment opportunities, especially to the lumpens who are employed by the parties to muscle votes.Given that the money is spent on consumption items, all these related industries will see a higher and more rapid multiplier effect which will help stimulate the economy. It is pan-India and not project or region specific. So, the benefits percolate throughout the country. Hence, even pessimistic economists should see a high GDP growth rate in the first quarter of 2009-10. There is hence, a very thick silver lining here to the so called wasteful expenditure, much like the Keynesian 'digging up holes to fill them up' policy.
Let us look at the outlays involved. Based on what the EC has mentioned as well as the numbers of the earlier elections, there would be at least 5500 candidates in the fray who can officially spend up to Rs25 lakh each, amounting to Rs1350 crore. The number would only move upwards as more candidates enter the fray. There would be 8 lakh voting booths across the country. These booths would be in schools/panchayat offices, town halls with the paraphernalia of shamianas being erected. They have to be rented out for this time period which at an average cost of Rs10,000 per booth would add another Rs800 crore. This cost would be higher actually as the space has to be blocked for more than the day of the elections.There would be over 13 lakh EVM (electronic voting machines) used, which though already purchased would have to be serviced with batteries being changed and transported across the country, which at an average cost of Rs5000 would mean an expense of Rs650 cr. The EC also recorded that there would be around 40 lakh officials as well as 21 lakh security personnel who would be deployed. Each of these personnel has to be ferried, housed and looked after for more than 3 days around the elections which are spread around over 30 days. A conservative expense of Rs5,000 per head, would add another Rs3000 cr. It's a conservative estimate.Add to this the money spent by individual parties (there were 220 such outfits in the last Election), which could cross Rs1500 crore. The Congress and BJP are expected to spend at least Rs 1000 crore between themselves. Further, there would be vast sums of money paid to get votes, which is pertinent especially in UP and Bihar, and now more prominently in the southern states of AP, TN and Karnataka. This amount has been estimated to be Rs 2500 crore.Now, if we add up these numbers, the total direct cost would come close to Rs10,000 crore, which is probably more than what was spent on the recent US presidential elections. One may take umbrage to this amount being spent, but there is need to reflect over the implications. This number is equivalent to the infrastructure announcements made by the government or the tax cuts given to various industries or the loan waivers announced earlier. It covers the entire country, and more importantly provides additional purchasing power to several classes.Most of this expenditure is on consumption and is instantaneous. Further, this money provides succour to industries such as transport operators (trucks, tempos, autorickshaws, taxis), paper, ink, tent houses, artists, roadside food stalls, diesel/petrol dealers, advertising agencies etc. It provides employment opportunities, especially to the lumpens who are employed by the parties to muscle votes.Given that the money is spent on consumption items, all these related industries will see a higher and more rapid multiplier effect which will help stimulate the economy. It is pan-India and not project or region specific. So, the benefits percolate throughout the country. Hence, even pessimistic economists should see a high GDP growth rate in the first quarter of 2009-10. There is hence, a very thick silver lining here to the so called wasteful expenditure, much like the Keynesian 'digging up holes to fill them up' policy.
Tuesday, March 17, 2009
Sub Seven: Financial Express: 16th March 2009
It is often said that despite the financial crisis and the global recession in the rest of the world, India will remain one of the fastest growing economies, touching the 7% mark (7.1% is the government’s estimate) and trailing only China. The CSO had two releases on growth in the month of February 2009. The first one had a forecast for 2008-09 while the second one had an update on the progress made in the third quarter of the year, as well as that for the first three quarters. We also have numbers coming in from the CSO on industrial performance for this period, while the Ministry of Agriculture has not presented a very pleasant picture in its second advanced estimates for agricultural production.
Based on the agricultural estimates put forth, around 80% of the rabi crop comprising cereals, which will be harvested in the fourth quarter would actually decline by 1%, while the balance in the form of pulses and oilseeds would increase by 2.4% and 6.6% respectively. Quite clearly, growth of 8.2% may not be attainable under these conditions unless prospects for cereals, especially wheat changes dramatically. Industry has already shown low growth rates of -1.11%, 1.76% and -2.51% in October, November and December respectively. With growth averaging 3.4% so far, it would be a bit difficult to suddenly surge to 6.2% to justify 4.1% growth for the full year. The same holds for electricity which has had three declining growth rates. Therefore, in the real sector it would be difficult to achieve the desired growth rates. This picture has held based on the impressionistic views presented by various sectors of industry in the first 2 months of this calendar year.
The other sector which has to accelerate is trade, hotels etc. which has been one of the more buoyant sectors registering growth of 9.4% this year . However, around half of this sector is explained by transport and communications, where growth is inexorably linked with that in the real sector. Also with foreign and domestic trade slowing down in the last 4-5 months on account of the recession and the fall in tourism following the terrorist attacks in Mumbai, growth could at best be sustained at the existing levels. The finance, insurance, etc. sector is already in the slowdown mode, with the banking and insurance sector, which accounts for 40% of this sector’s output, facing stagnant business lines. The two sectors that have excess growth capacity are construction and community and social services, which together account for 20% of GDP. These sectors have accelerated growth and will have to make up for the loss of growth in the other sectors. The construction sector is up mainly due to the efforts of the government in the form of infrastructure projects as the housing industry is still to pick up under the generally adverse economic conditions. The category of community and social services also includes general administration which at times may convey the impression of growth due to the higher level of expenditure of the government. Around 40% of this component is accounted for by public administration and defence. There is scope for an increase in this component, which can affect around 5.2% of GDP.
Therefore, with virtual zero growth in agriculture expected this year and possible negative growth in industry or at best marginal growth in the next three months, there has to be overwhelming growth in the construction and government sectors to boost growth. Growth of 7.7% in GDP in the last quarter of the year is hence not attainable and a number in the range of 5% looks more reasonable. With growth of 5% in the last quarter, overall growth would be around 6.4%. In a better case scenario of 6% growth in the last quarter, annual growth would get enhanced to 6.6%. The 7.1% number certainly does not look plausible in the context of the horizon that exists today.
Based on the agricultural estimates put forth, around 80% of the rabi crop comprising cereals, which will be harvested in the fourth quarter would actually decline by 1%, while the balance in the form of pulses and oilseeds would increase by 2.4% and 6.6% respectively. Quite clearly, growth of 8.2% may not be attainable under these conditions unless prospects for cereals, especially wheat changes dramatically. Industry has already shown low growth rates of -1.11%, 1.76% and -2.51% in October, November and December respectively. With growth averaging 3.4% so far, it would be a bit difficult to suddenly surge to 6.2% to justify 4.1% growth for the full year. The same holds for electricity which has had three declining growth rates. Therefore, in the real sector it would be difficult to achieve the desired growth rates. This picture has held based on the impressionistic views presented by various sectors of industry in the first 2 months of this calendar year.
The other sector which has to accelerate is trade, hotels etc. which has been one of the more buoyant sectors registering growth of 9.4% this year . However, around half of this sector is explained by transport and communications, where growth is inexorably linked with that in the real sector. Also with foreign and domestic trade slowing down in the last 4-5 months on account of the recession and the fall in tourism following the terrorist attacks in Mumbai, growth could at best be sustained at the existing levels. The finance, insurance, etc. sector is already in the slowdown mode, with the banking and insurance sector, which accounts for 40% of this sector’s output, facing stagnant business lines. The two sectors that have excess growth capacity are construction and community and social services, which together account for 20% of GDP. These sectors have accelerated growth and will have to make up for the loss of growth in the other sectors. The construction sector is up mainly due to the efforts of the government in the form of infrastructure projects as the housing industry is still to pick up under the generally adverse economic conditions. The category of community and social services also includes general administration which at times may convey the impression of growth due to the higher level of expenditure of the government. Around 40% of this component is accounted for by public administration and defence. There is scope for an increase in this component, which can affect around 5.2% of GDP.
Therefore, with virtual zero growth in agriculture expected this year and possible negative growth in industry or at best marginal growth in the next three months, there has to be overwhelming growth in the construction and government sectors to boost growth. Growth of 7.7% in GDP in the last quarter of the year is hence not attainable and a number in the range of 5% looks more reasonable. With growth of 5% in the last quarter, overall growth would be around 6.4%. In a better case scenario of 6% growth in the last quarter, annual growth would get enhanced to 6.6%. The 7.1% number certainly does not look plausible in the context of the horizon that exists today.
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