Friday, 28 March 2014

Grow baby, Grow

If you saw India's financial position in the previous post, you could be excused for opining that we must cut expenditure. For most other countries, that would be the answer. But not for India. For India, the mantra has to be grow baby, grow.

India is uniquely positioned. It has all the ingredients for rapid growth - a hitherto underdeveloped economy, a dynamic and large domestic market, a large and young population, an education ethic coupled with hard work (mostly), and all the institutions that can enable growth. The trouble is that it has been constrained all these years - first by socialist claptrap and second by the neta babu raj.

You can see why growth has to be the single most important mantra for the next 10 years

  • The only way to provide economic upliftment for large sections of the population is through facilitating employment. The only way to facilitate employment is through economic growth - not by giving doles under the guise of the NRGEA.
  • Economic growth will lead to explosion of tax revenues to the government - helping close the yawning gap between revenues and expenditure and enabling big rises in productive expenditure.
I submit we should target a 8% GDP growth year on year for the next 10 years. We should completely forget about equality of wealth  during that period (let a few people get rich; remember the immortal words of Deng Xiaoping when he set China on the growth trajectory). A decade later we can stimulate more equitable growth. For now, go full blast for growth. Let us have the enviable problem of the economy overheating through too much growth, a la China.

Growth can be achieved by the following strategy

  • Reform the land acquisition policy - this is the most difficult reform of all.  Set up an independent body that will adjudicate on land acquisition issues. Set fair purchase price, insist on all families selling land to be provided employment, and establish the principle of 75% acceptance means the other 25% have to compulsorily give in.  The independent body shall be a quasi judicial body and the courts should refuse to intervene. Decision making by the body must be in short frames of time - say 3 months. Establish fair and transparent process and public acceptance would come. Ruling party , in its own self interest, should not instigate trouble in opposition ruled states.
  • Single window clearance of industrial proposals by the government. Speed of clearance is essential - no more than 1 month, else clearance is deemed to have been made. No bureaucrat is to be made the subject of a CBI investigation for a decision that may later prove to be correct or incorrect - he should only be investigated if he has personally made money in the process.
  • Trawl through all the laws relating to commercial enterprises - be it in agriculture, industry or services and repeal 75% of them, taking some risks in the process. Strict laws should only be in some limited areas such as consumer and worker health and safety, pollution, etc. In other areas, the government should stop its utopian meddling. There is a precedent for such action - when the 1991 reforms happened, this is exactly what Manmohan Singh and Chidambaram did in the field of exports . Some unintended consequences may happen, but that is a price to pay for growth and can be subsequently corrected.
  • Enact the new Direct Taxes Code and the Goods and Services Tax, which has been in legislative limbo for a decade. This will make India one economic entity rather than each state erecting boundaries. If some states with opposition governments do not fall in line, they should be ignored and the rest should proceed. This will give stability in taxation.
  •  Throw open every sector to domestic, foreign or extra terrestrial investment. Frankly it doesn't matter in today's world where the capital is coming from. If it comes from outside, all  the better - government's finances will be eased.
  •  Big push to infrastructure for the next 5 years - power, ports, roads and railways. The government needs to do very little - simply allow private capital to do its job and not come in the way. Power sector reforms are essential - this is a specialist area by itself, but India has tied itself into knots. I won't get into the details of power reforms, but it just needs a strong leader to remove all the shackles, price power  economically (no freebies), buy / bully peace from the environmental lobby (no dilution of pollution standards however)  and let the problem solve by itself in 5 years.
  • Access to capital is already good for economic enterprises - both equity and debt. The government needs to do nothing different and simply maintain status quo
  • Make regulators independent, arm them and leave them alone to do their job. SEBI and RBI are two excellent examples that do this today. In every sector, simply clone this model.
  • No subsidies, tax holidays, nothing,  for industries.  The sheer economic opportunity will spur investment. No sops needed.
  • The industry and services sector do not need government intervention or help. Agriculture does. I am not an expert on policy measures required in agriculture, but entrust that task to experts like  M S Swaminathan and simply implement whatever they say.
  • Above all, glorify speed. Introduce a law that specifies time limits for every governmental or regulatory action. No sitting on files. Making a wrong decision in haste is not a crime. Making no decision at all IS a crime. 
  • Shift government's approach to economic activity to one of facilitation and not of investigation. Shamelessly court economic activity of any kind without making moral judgements on relative merits of one over the other. In that process a few (even many) rotten apples may slip through. I submit this is an acceptable price to pay for growth.
  • Create an overwhelming momentum for growth. When the momentum is overwhelming, opposition is difficult and might be restricted to a few areas. Backtrack there and let loose the rest of the push.
Growth will not be smooth - there will be some areas where things will turn out badly. Some (the 1%) will make huge money. Some will be left out. But a large and overwhelming majority will be uplifted. The example of China proves that this is indeed the case.  It is worth taking the risk, because inaction and not growing is sure to doom the majority of our brothers and sisters to perpetual poverty. That is a bigger crime.

What of corruption ? That is such an important topic in India that it will be the subject of  a full post that shall follow.

How can this be politically sold. Again a topic that deserves a full discussion in a separate post, also considering the implications of the proposals on the expenditure side.

Simultaneous with the growth push, the government should also remove income tax exemptions for agricultural income, for house property if reinvested, for long term capital gains etc. Very few (preferably nil) exemptions must exist in the tax code and the rates should remain at the current 33%. This has been the direction of tax laws anyway since 1991 - that's why income tax collections are such a success relatively speaking.

A GDP growth of 8% plus the removal of exemptions will result in tax revenues rising by at least 10% per annum. That will mean an additional Rs 1 lakh crores of revenues each year. Coupled with sensible policies on the expenditure side, the country can actually step up productive expenditure, and bridge the deficit, at the same time in 5-10 years.

Will such an approach work ? Yes it will. There are two examples in history. India itself in 1991, did something like this. The result is plain for all to see. And then there is China from 1980 to 2000. The Chinese example has one major difference - it was all government led with most of the investments coming from the government. I am recommending the opposite of this. The growth will be private led with governments only facilitating - for the Indian government today is not financially in a position to do any better.

For those interested internationally, this strategy can work only for India, and partly for Nigeria and Indonesia. It will not work for any other country. For those interested, happy to debate offline !

In the next post, we shall turn our attention to the expenditure side.

What do you think ?

Thursday, 27 March 2014

India's Economic Manifesto - 1

Continuing from the earlier post, we will attempt to understand, and then co create an economic manifesto for India. This is in the context of the upcoming Indian elections, where this blogger believes that

  • Economic upliftment is the most important objective for the nation.
  • Political parties are either completely ignoring, or not doing justice to an economic manifesto 
  • Where they are publishing manifestos, they are mouthing platitudes like we will create X million jobs, we will abolish poverty, etc etc without a word as to "how".

This series of posts cover only the economic tasks before the nation - not social or political or other  issues which are also important. Since this is a business blog, and this blogger believes that economic advancement is the most important priority for the country, we will focus exclusively on economics.

In order to consider what should be the strategy ahead, we should firstly understand where we are. This post explains India's current financial situation. This is grossly simplified, not exactly accurate, with my own classifications , avoids technical jargon, and is not as economists would put it - but this is broadly correct and will enable us laymen to understand the country's position. They represent only the Central government position - not that of the states.

India's central revenues for the year 2013-14  were as follows

Revenues           Rs crores
Income Tax            629,871
Customs            175,056
Excise            179,538
Service Tax            164,927
Non Tax Revenues            193,226
Capital Receipts              36,643
Less States' share          (322,880)
Total Revenues   1,056,381

 India's central expenditure in 2013-14 was as follows

Expenditure      Rs crores     Rs crores
Interest        380,066
Defence        203,672
Food Subsidy           92,000
Fertiliser Subsidy           67,971
Petroleum Subsidy           85,480
Rural Devp Subsidies (incl NRGEA)           78,452
Pensions to Govt staff           74,076
North East Subsidies           24,262
Police           43,148
All Others        144,227
Non Productive Expenditure         1,193,354
Education           67,398
Health           30,145
Railways           30,223
Roads           21,399
Agriculture           17,557
Industry           22,393
All Others           88,926
Productive Expenditure            278,041
Grants to States for Plan Expenditure            119,039
Total Expenditure        1,590,434
Note : Classification of "productive" and "non productive" is my own

As a nation, our revenues are Rs 10 lakh crores and our expenditure is Rs 15 lakh crores. So every year we borrow Rs 5 lakh crores to make up the shortfall. The primary reason why there is inflation of 10% + in our country is this.

In understanding this situation, the following explanations may be helpful

  • The interest line in the expenditure is the cumulative effect of all these deficits which have built up over the years and we keep adding to the burden every year. In the short run, we can do nothing about this item
  • The states' share, both in the revenues and in the funding of plan expenditure is constitutionally mandated. This cannot be touched, in terms of percentage.
  • This represents only the Central position. They do not consider state revenues and expenditure . Most states run bigger deficits than the centre and have major subsidies and freebies in their expenditure. There is no ready consolidation of central & state finances - so I am not able to present that position to you.

You can now perhaps understand why this should be the starting point for any manifesto. If a party says they will spend $1 trillion on infrastructure (as the Congress Party said yesterday), you can clearly see that this is bullshit - there is no money. This is also the reason why the BJP plank of replicating the Gujarat model is questionable - how will they create infrastrcuture when the financial position is as bad as it is now - there is no money to spend on infrastructure unless hard decisions are taken on non productive expenditure. No political party is explaining this reality to the voters.

We will begin our own manifesto from here. We will not only present a manifesto, but also how this can politically be sold to the voters - for without that, all this will only be theory.

Readers are  invited to offer their ideas.

Tuesday, 25 March 2014

An economic manifesto for India

Indian elections are around the corner – easily the most complex democratic exercise on earth affecting one in seven people in the world directly, and more indirectly.

Democracy is all about choices. In order for that to succeed, the choices must be clear. The biggest issue facing India is economic – how to lift millions of Indians out of poverty and give the best possible economic advancement for as many Indians as possible. And yet, if you see the electioneering, there is total absence of economic policies or what the choices are. There are general myths , perceptions and blind loyalties on which the people are being asked to vote. No specifics at all. 

In the area of economic policy, the front runner is arguing that he would replicate the success of Gujarat nationally.  That is fine, but how would he do it ? India is not Gujarat.  It is far more complex and requires an entirely different set of policies.  So what specifically  would he do to ensure “development” (his favourite word) in India.  Complete silence.

The incumbent is maintaining complete silence as well. If the track record of the last ten years is anything to go by, he would be a disaster. If he is going to change tack, then he should say what is the new direction he would take. Nothing there

There is a motley crew who would all like to be the leader and who would like to constitute the third or fourth or fifth fronts. They are all, especially the three women amongst them, economically illiterate and their track records in their respective states is abysmal.  No announcement about what their policies would be, except the lady from the East mouthing some general platitudes.

Then there is the new kid on the block. We do not as yet know, whether any of his pronouncements are to be taken seriously, but the general feeling, economics wise, is that it would be the biggest disaster of them all. In any case his philosophy appears to be that noise is better than policy.

This is ill serving the people of India. If we are to make a choice, we need a specific manifesto. In the absence of any of them stating this, this blogger, in his hotheaded way is proposing to offer one. Not that anybody would take the slightest notice, but then blogging is all about airing one’s views. 

In the next post, I will outline India’s revenues and expenditure in a simplified way and ask you to make the choices. Then we will together, co create an economic manifesto. How about it. I will also plead with some of my usually silent readers to also articulate their view on the choices  - every Indian should think about the way forward.

By the way, the theory that economics does not matter with people and that they will not be influenced by what is economically the right thing to do is completely untrue. For evidence, you only have to look towards China. The entire legitimacy of a system of government that is unitary, non choice based, dictatorial , non representative, etc etc is the implicit economic contract with its people. Politicians in India might wish to ponder over the reality that if a free and fair election were to be held in China today, the Communist Party would romp home with a three fourths majority.

We will also cover the political side of the economic argument – how to sell it to the voters as well.   

Walk the next few days with me - I promise that the discussion will not be too technical. Let us create our own manifesto for India.

Friday, 14 March 2014

Huānyíng guānglín

China exports far more than it imports. Everybody knows that.  Oversimplified , the difference between goods and services exports and goods and services imports is called the Current Account balance. It can be a surplus or a deficit. China has seen a surplus for a long time. India has seen a deficit for a long time.

China's current account surplus reached a high of 10% of GDP in 2007. Under normal circumstances if such a chronic situation existed, the currency would rise making imports cheaper and exports costlier leading to an equilibrium. But China was controlling exchange rates, which led to massive imbalances in the world economy.  The US led the chorus terming China a currency manipulator. In any case, such huge imbalances affected the global economy in all sorts of ways.

What to do about the problem ?

Well, the problem has started to be solved by itself, in a way few would have anticipated . China's current account surplus has fallen to 2% of GDP.  What on earth has happened ?

China's surplus in goods continues to be vast. It continues to export merrily way above what it imports. What has depressed the surplus, however is that it now runs a huge deficit in services. Put together, the net surplus is now low enough not to be a burning issue.

How has a huge deficit in services been built up - at $122 bn, it is the largest deficit in the world (after all everything in China comes in gigantic proportions). Just one component contributed to  $ 80 bn of this $ 122 bn. Tourism with a capital T.

In 2007, China faced a surplus in tourism as well - more people visited China than Chinese visiting the world. In 2013, that has completely turned topsy turvy. Millions of Wangs and Lis are packing their bags and touring overseas. They exchange their yuan for dollars to spend. They are, in effect "importing a tourist experience". Hence this massive deficit !

The "solution" to trade imbalances that threatened the world is simple. Here's a neat solution for the US, which could be copied by virtually every country. Abolish the need for visas for Chinese to visit your country. Welcome them with open arms. Put up Chinese name boards, direction signs, everywhere. Train everybody in the tourism industry to speak Chinese. Open a million Chinese restaurants. Serve chicken feet for breakfast. Set up gambling resorts purely for foreigners if you don't want to corrupt the locals (the Chinese love to gamble; that's why Macau is many times bigger than Las Vegas now). Open  MSNBC Chinese and FOX Chinese (Yuk) ! Get P. Diddy to rap in Chinese. Get Ryanair and Southwest Airlines to fly to mainland China. Etc Etc Etc. Actually, the US government needs to do nothing - all this will happen anyway.

It will solve many problems. The trade imbalances will disappear. A huge spending boost will come to the US. Every teen star from Justin Bieber to Selena Gomez will add 100 million more fans. If American style democracy is indeed good for the world (a highly debatable hypothesis, but we shall let that pass), then exposing millions of Chinese to "freedom" (NSA notwithstanding), can only be to the good. Preet Bharara can turn to suing Chinese for violating sacred American laws by spitting.  A win win, if there ever was one. Or Wang Wang, if you prefer !

By the way, if you are wondering what the title of this post is, it is simply "Welcome" .

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