It’s the elections, stupid

Pranab Mukherjee is starting to look worryingly like a feckless heir squandering his generous inheritance while his fretful guardian in the person of Duvvuri Subbarao tries to board up the door and keep the wolves at bay with a nail here and a nail there.

The “history sheet” is simple and clear. Later this month, Mukherjee will present his third budget since the United Progressive Alliance came to power in the 2009 election. UPA-I, by hugely increasing social-sector expenditure in its two final years, 2007-2009, effectively torpedoed the Fiscal Responsibility and Budget Management Act, which mandates that fiscal deficit be cut to 3 per cent of GDP by 2008/09.

India’s financial mandarins argued that fiscal stimulation was called for to battle the global downturn and to deepen “inclusive” growth. The fiscal deficit shot up to 6.0 per cent in 2008/09, 6.7 per cent in 2009/10, and is projected at 5.5 per cent in 2010/22. As a Royal Bank of Scotland analysis put it, even if you take the windfall from the 3G spectrum auction into account, achieving next year’s 4.8 per cent target seems impossible. And to think that back in 2004, flush from its victory, the UPA actually predicted a balanced budget by 2008/09.

Experts will tell you that once the economy had come through the recessionary shoals, the aam admi stimulus ought to have been pulled back and more funds poured into infrastructure and manufacturing. Instead, populist spending is only likely to increase, said Dr Rajiv Kumar, Director General of the Federation of Indian Chambers of Commerce and Industry, or FICCI. Mukherjee, ever the fixer-upper for the Congress party, will have to keep an eye out for five key state elections this summer, including West Bengal, Tamil Nadu and Kerala. The spending cannot stop. The Uttar Pradesh state election in 2012 will call for some huge sops. Then comes 2013, and the general election – assuming the UPA government is still in power, scandals, legislative gridlock and all.

An international economist who closely watches India said with ample revenues in its coffers, the fiscal situation ought to have improvc1ed. “But it is not. Instead, all the revenues (and more) are being spent on new social programmes. Now it is true that social indicators are poor, and more needs to be done to help the poor. But it is hard to avoid the impression that the government sees the poor as vote banks, which they can tap as long as they provide them with funds. And surely at least a portion of the revenues could be saved, to give India some manoeuvring room in case a crisis hits?”

“There has been too much stoking up of consumption demand,” said Kumar, “and not enough capacity expansion.” The central bank, too, says only by spending more on capital expenditure will the government be able to fight some of the bottlenecks that contribute to supply-side inflation.

Inflation is now entrenched, and food price inflation is here to stay, fuelled by rising consumption of proteins as buying power increases in the countryside. The RBI’s review of the September-December 2010 economy commented drily that “The rise in food inflation has not only persisted for more than two years now, the increase has been rather sharp in the recent period.” And Subbarao, in his January 25 statement after the central bank raised interest rates for the seventh time this fiscal year, said: “Food inflation has remained at an elevated level for about two years and the prospect of it spilling over to the general inflation process is rapidly becoming a reality.” And so the RBI has raised its estimate for inflation to 7.0 per cent by March-end.

“If you chart inflation, there seems to be a clear break in 2006. Before that, inflation wasn't much of a problem; since then, it has been. Initially much of this was because of food price increases. But now prices are rising more widely, and it is hard not to conclude that monetary policy needs to be tightened substantially, so we can put inflation ‘back in the box’,” Joshua Felman, a former International Monetary Fund, or IMF, representative in India, said.

But monetary policy is a blunt instrument to beat inflation over its head with. The RBI rubbed this in: “Monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.”

Because of poor storage and infrastructure, there are huge productivity losses. “And supply is unable to keep up,” said Kumar. “At the same time, cereal yields have been stagnating.” A Nomura paper on food prices last September noted that the food weighting in consumer price inflation, or CPI, in advanced economies was typically between 10 and 20 per cent, whereas it was about one-third in China and as high as 46 per cent in India. “A sustained surge in food prices can have more pernicious effects if it unmoors inflationary expectations, impelling workers to demand higher wages to compensate for rising food costs, thus setting off a wage-price inflation spiral,” the Nomura report said. This is exactly what is happening in India.

With bank lending rates upward of 11 per cent, manufacturers face a nasty squeeze. FICCI’s Kumar pointed out that 90 per cent of State Bank of India lending over the past three quarters went towards infrastructure projects, and only 10 per cent went to manufacturing. “The cost of capital is likely to go up further,” said Kumar.

Dr Chakravarty Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, said food inflation has been a problem for over two years. “In a situation like this, management of the supply side is critical,” he told Business Today. In mitigation, Rangarajan said, prices of cereals like wheat and pulses have dropped, but the prices of meat, fish, eggs, vegetables and fruit have risen sharply.

Felman, who now works in the IMF’s research department in Washington, D.C., said he was worried about whether investment is truly recovering. “Here the signs are very mixed. Credit is growing nicely, and infrastructure projects such as power and roads seem to be moving ahead. But other greenfield projects seem stuck, held back by investor caution, land issues and the complex process of securing environmental clearances. So, investment does not seem to be booming the way it was before the crisis, and this is worrisome.”

The RBI’s quarterly review echoed with warnings. The current-account deficit, or CAD, will hit 3.5 per cent this fiscal year, and is “unsustainable”, the central bank said. But with global commodity prices rising, import bills look like staying high. Foreign direct investments, or FDI, could help finance this deficit, but the bad news is that FDI flows into construction, real estate, business and financial services have declined, while foreign institutional investors’ equity investments accounted for 79 per cent of net capital inflows of $36.7 billion during April-September 2010. This is clearly not desirable or sustainable, and the central bank said that “environment sensitive policies” – read Jairam Ramesh’s activism – have triggered a fall-off in FDI. “Added to this are the persistent procedural delays, land acquisition issues and availability of quality infrastructure,” the RBI said.

Will the UPA government quicken reforms to address these problems? The international economist was not sanguine. “Everyone expected that once the Left Front was kicked out of the coalition, reforms would accelerate. Instead, they've slowed down,” he said.

The IMF’s Felman said his final concern was the “governance deficit”. “A decade ago the question for reformers was whether the government would give the market sufficient space to operate,” he says. “Now, the issue is the reverse: whether the government has sufficient room to do what it needs to do, namely set fair rules of the game in which firms would operate. In a nation where there are more than one billion competing people, each striving for a fair chance in life, this is not just a problem. It is a tragedy.”

The Secret Life of the Manic Depressive Market

Not very long ago I watched a fascinating documentary by Stephen Fry on manic depression. I was reminded about the rollercoaster mood swings of people in that movie as I watched the markets on Budget Day. Panel after panel of pundits debated why the budget had not delivered the flavourful cocktail they thought the people had been thirsting for. Although the salaried class, senior citizens and women wage-earners benefited from some tax trimming, the consensus was that this was not a go-for-it reform budget.

Wait a minute – so the speculators and the day-traders and the swashbucklers were caught with their shorts down. Public memory is very short. People have forgotten that the Bombay Sensex rocketed 52.57 % between January 1 and June 30 this year. In comparison, the Dow Jones Industrial Average has actually fallen from 9034 on January 1 to 8447 on June 30. And China’s benchmark Shanghai Composite Index has also rocketed 71.6 % between January and June – but don’t forget that China’s much bigger economy is recovering faster than India’s – the OECD estimates that China will grow at 7.7 % in 2009 and 9.3 % in 2010.

So the journey of the Sensex this year can only be described as manic. Did the fundamentals merit this kind of irrational rise – or Monday’s depressive fall? India has been in the grip of a recession, just like the rest of the world.

Nobody really knows how badly the aam admi, the common Indian, has been hit – 92% of the workforce is in the “informal” or unorganised sector, so unemployment figures are poor estimates. Anecdotally, it is clear that millions of people have lost their jobs in the gems and jewellery, textile, leather and small and medium enterprise sectors. India does not also publish reliable bankruptcy figures.

Another indicator is the massive slowdown in industrial production, to 2.4% in 2008/09 from 8.5% a year earlier. Exports and imports both declined sharply; the trade deficit ballooned 35% to $119 billion, and foreign exchange reserves declined by nearly 17% to $262 billion at end-May.

Mukherjee listed several steps to aid exporters. But internal investment has plunged -- growth in fixed capital formation declined from 12.9 % in 2007-08 to 8.2% in 2008/09. External commercial borrowings dried up, capital accretion through the stock markets slowed to a trickle, and banks became much more reluctant to lend.

How many people exactly are out of work in India? We can try to piece the answer together from shards scattered in many places. The “Approach to the Eleventh Five Year Plan” (2007-12) said that unemployment rose from 6.1% in 1993/94 to 7.3% in 1999/2000 and 8.3% in 2004/5.

Unemployment among farm workers rose to 15.3% in 2004/05. Growth in real wages of farm workers slowed down in the 2000s as agricultural growth decelerated.

The Planning Commission estimated in 2007 that the number of unemployed totalled 36.7 million in 2006/07. It predicted optimistically that this would fall to 23.3 million in 2011/12. But that was before the global crisis. “This growing integration of the Indian economy with the rest of the world has brought new opportunities and also new challenges. It has made the task of sustaining high growth more complex,” Pranab Mukherjee said, almost ruefully.

Instead of bold changes in direction, the finance minister announced he would pump even more money -- Rs 39,100 crores ($8.3 billion) or a 144% increase over 2008/09 -- into the National Rural Employment Guarantee Scheme, which created jobs for 44.7 million people last year. This is going to be even more critical given that growth in the agriculture sector slumped to 1.6% in 2008/09 from 4.9% a year earlier.

So there may not have been breathtaking reforms, but there was plenty of stimulation, totalling Rs 186,000 crore ($39.6 billion) in 2008/09, and that pushed up the fiscal deficit to 6.2 % of GDP. That will rise further to 6.8% of GDP in 2009/10 – the finance minister proudly remarked that government expenditure will exceed 10.2 trillion rupees ($217 billion) this fiscal year, a leap of 36% over last year. That is going to be fuelled by a 50% rise in government borrowing. After his speech, Mukherjee told a TV interviewer that this was not too alarming because the U.S. fiscal deficit was likely to be 11% of GDP this year. Odious comparison indeed! A recklessly indebted government always crowds out other borrowers, and that can only have a long-term negative impact on manufacturing, services, and therefore exports. And that is why the Fiscal Responsibility and Budget Management Act, which requires the government to cap the fiscal deficit at 3% of GDP and to eliminate the revenue deficit, is so important.

Actually, as the RBI noted in its April policy statement, the combined Central and State fiscal deficits, plus special securities issued by the centre outside the market borrowing programme, will take the nation’s fiscal deficit to 10.8% of GDP. No wonder the ratings agencies are getting more and more twitchy by the day, and that Mukherjee said the challenge of recovery has to be shouldered jointly by the centre and the states.

“The deficit is too high and India cannot go on like this,” a senior international finance official told me. Alarming, he said, was the fact that the Reserve Bank of India had also flouted the FRBMA and started buying government securities again under the market stabilisation scheme – a dangerous spur for inflation. Intertestingly, the RBI’s April policy statement noted that the combined market borrowings of the central and state governments in 2008/09 were two and a half times the level in 2007/08.

Mukherjee said net market borrowings are likely to hit Rs 400,000 crores in 2009/10. In the first half of this fiscal year alone, the RBI has committed itself to purchase government securities under open market operations to the tune of Rs 80,000 crores. In the absence of a corporate-bond market, this means that “real interest rates” will be unrealistically high for companies who are getting muscled out of the debt markets by the government-central bank behemoth.

Mukherjee pledged to return to the “path of fiscal consolidation at the earliest”. But his ministry’s Economic Survey, published last week, said it might be time to go for an “FRBM-2” of zero fiscal deficits.

The stimulation cannot be denied – the Sixth Pay Commission is estimated to have pumped close to an additional Rs 117,000 crores ($25 billion) into government employees’ wallets since last October, and may have added 1.1 percentage points to GDP.

The OECD predicted last month that India’s GDP would likely grow at 5.9% in 2009 and 7.2% in 2010, after 6.7% in 2008/09. Mukherjee said the goal was to return to 9% growth. The stark reality is that India needs to grow at double digits if it is to address poverty, hunger, malnutrition, and illiteracy.

But the past year has laid to rest the myth that India’s “inclusive” economy shields it. Mukherjee referred in glowing terms to Indira Gandhi’s bank nationalisation 40 years ago as one of the bulwarks against global turbulence. “This is complete nonsense,” the international finance official said to me. “No Asian bank has run into any serious problems so why is India patting itself on its back? The conservatism of Asian bankers saved them.”

(This piece appeared in the Khaleej Times on July 10, 2009)

On a Wing and a Prayer

Last week I called up a friend. She was on the train from Bangalore to Chennai. I was surprised. She is not the kind of person who travels by train. I asked her how long the train journey takes. Four and a half hours, she replied. So why are you taking a train when you are so busy and time is so important, I asked. Simple, she said. “It takes an hour and a half from my office to Bangalore airport. Then there is check-in, security checks, a delayed take-off because the plane arrived late, more time on the tarmac while waiting for clearance from Air Traffic Control, and then a 45-minute flight. I found it quicker to take a train. There is less stress, minimal turbulence, and I can read a book!”

This is really the story of India, and of countless surveys and papers in which Elephant India is compared with Tiger China. I have travelled to nearly every country in Asia and their airports always made me cringe in shame at the memory of Delhi or Mumbai. Changi, Chep Lak Kok, Incheon, Bangkok, Narita, Kansai, Beijing, Shanghai, Jakarta, Lahore – even Hanoi and Ho Chi Minh City and Phnom Penh – all made me wish I could return to Delhi and not have to descend dark stairs, get into a jerky bus, and enter a terminal building with a smelly entranceway to wait for baggage that is brought in on clanking trailers and thrown roughly on a creaky old belt by tired men.

Just before the elections, as my plane circled Delhi, I was struck by how similar our politics and our state-owned airline are. "We know you have a choice of other airlines (parties) but we appreciate your custom (votes)". Ageing aircraft (infrastructure) crewed by ageing staff (politicians). Endlessly stacked-up planes waiting for permission to land ... don't they conjure up a picture of endless project delays? "Don't blame us, blame the weather/air traffic control/technical faults/late arrival of our own plane" sound so much like "Don't blame us, blame our coalition partners/the opposition/the global economy/the ISI/late arrival of the monsoon".

It costs more to fly from Delhi to Kerala than to Singapore, but that's not our fault -- look at how our nasty trade partners are trying to get us to lower our tariffs and taxes so they can fill our skies with their planes. Lost baggage (promises)? Not our fault again -- it's our alliance partners. Please continue to give us your business (votes) -- we promise things will get better once we have that extra runway (a few more parliament seats). Coming off my plane, exhausted and wrung-out, I saw signs that promised a better airport by next year. Where would we be if we had not offered to host the Commonwealth Games?

Prime Minister Manmohan Singh has referred constantly to the need for more infrastructure to lift India out of the seven to eight percent growth rut. If India does not grow at a steady double-digit rate over the next decade, the elephant will stumble, and fall to its knees. Last week President Pratibha Patil referred to infrastructure as one of the key goals of the new government: “(Attention to recession-affected sectors) must be accompanied by measures to achieve a countercyclical expansion in public investment in infrastructure sectors including public-private partnerships in these sectors. Financing the investment will be a critical constraint and my Government is determined to ensure that innovative steps are taken in this area, consistent with a medium-term strategy of prudent fiscal management.”

Back in February, India’s interim budget said 50 new infrastructure projects worth Rs 67,700 crore ($14.5 billion) had been approved, and the India Infrastructure Finance Company, which will finance 60 percent of commercial loans in critical public-private partnerships, plans to raise Rs 30,000 crore ($6.8 billion) during the current fiscal year ending March 2010.

It helps if you are a Congress government with a clutch of Nehru-Gandhi names to christen every new populist spending plan. We have the Jawaharlal Nehru National Urban Renewal Mission, which has spent over Rs 50,000 crore ($10.6 billion) over the past four years on the “urban poor”. Under the Indira Awas Yojana, the government has built more than six million homes for rural poor. And now, President Patil has announced the Rajiv Awas Yojana, which aims to build a “slum free” India for the 62 million people living in shanties in the nation’s cities.

All these schemes come at a steep price. There was a huge surge in what can only be described as election-year fiscal profligacy in 2008/9. The government’s revenue deficit shot up to 4.4 percent of GDP against an estimated 1.0 percent – a four-fold increase. The fiscal deficit has alarmingly rocketed to Rs 326,515 crore ($69.5 billion) or 6 percent of GDP from the original estimate of 2.5 percent. In ordinary language, the Indian government was printing money – literally. And Reserve Bank of India figures bear this out. In the week ended May 29, currency in circulation totalled Rs 709,364 crore ($150.9 billion), a rise of Rs 96,699 crore ($20.6 billion) over a year earlier.

But what about the poor in India, the target of all this largesse? Are the country’s 1.2 billion people truly moving towards economic equity? In its Global Economic Prospects 2009 report last December, the World Bank noted that rising food prices were hitting the poor hardest. In urban areas in South Asia, it warned, poverty levels had gone up by as much as 4.4 percentage points – the highest in the developing world.

Already, 32.3 percent of the urban population and 43.3 percent of the rural population in South Asia is poor, that is, living at or below the “poverty benchmark” of 1.25 U.S. dollars (less than 60 rupees) a day. This is only slightly better than Sub-Saharan Africa. “Capital inflows have diminished, contributing to falloff in investment growth, particularly in India,” the World Bank said in a March 2009 update. “Fiscal support for slowing economies may face constraints in already quite high budget deficits.”

In her speech to Parliament last week, President Patil said new targets will soon be set for rural electrification by the new government. That will be of some consolation to Ramakanta Sethi, a Dalit boy from the fishing village of Kendrapara in Orissa. Ramakanta, who herded cattle during the day, did exceedingly well in his high school examination, studying at night with only a kerosene lantern for light. When Chief Minister Naveen Patnaik, re-elected last month with a landslide majority on a good-performance ticket, congratulated Ramakanta on his success, embarrassed officials promised to make amends for the darkness in Kendrapara. Electrifying news indeed.
(This appeared in the Khaleej Times on June 9, 2009)

Putting It All Together Again (17 May 2009)

“India is a geographical term. It is no more a united nation than the Equator,” Winston Churchill said in 1931. At times during this election campaign that description seemed apt.
The surge of collective outrage after the November attacks in Mumbai quickly dissipated in a high-decibel assault of television and radio advertisements, voice and text messages and everything from YouTube to podcasts that painted every politician in the most garishly evil of hues. What else do you expect when you have to woo 714 million voters, many of whom would not even have heard the names of the 1,000 – yes, exactly that number – “registered unrecognised parties” in the field.

And yet, after a long, long time India’s voters have spoken in a clear voice. It is easy to forget, in the tumult and velocity that besiege us, that we teeter on the edge of the first decade of the 21st century. India has just decided to endorse a gentleman prime minister after one of the crudest campaigns in the past 62 years. Kandahar, Kandhamal, Godhra were thrown around in a frenzy of finger-pointing, but the reality is that a huge number of young Indians, 18 to 21, voted for the first time this year and that begins to explain the seismic shift that has occurred.

A few weeks ago, Manmohan Singh listed Naxalism, regionalism, terrorism and communalism as major dangers facing India. He failed to list negativism. Much is being made of the fact that Singh is only the second prime minister since Independence to sail into a second full term in office. Here is a 76-year-old man who speaks in a near-whisper, his heart patched together by much bypass surgery, and yet an electorate that grows younger by the day decides to give him more time to work for a better, more prosperous – and more optimistic – nation. Indians are weary of bad news.

It is no accident that Nitish Kumar in Bihar, Naveen Patnaik in Orissa, and Sheila Dikshit in Delhi have triumphed so spectacularly on a performance-based scorecard. The huge mini-nation of the National Capital Region is crawling with young Biharis who work in a myriad of service jobs – plumbers, electricians, watchmen, drivers. They are all exiles from a failed state, from a region that Lalu Prasad Yadav, feted by business schools for introducing clay tea cups on Indian trains, plunged into near-total darkness. The young man from Champaran who came calling on Saturday saw Nitish’s victory in simple terms. “Bihar had fourteen sugar mills in the past,” he said. “Now there are two. But things are beginning to work. There is light again.” A small irony – Lalu’s election symbol is a “hurricane lamp”. So it is performance that has been rewarded – nowhere more so than in Delhi, where Dikshit now not only is a third-term chief minister but has a 100% sweep of parliamentary seats to burnish her image. And in Orissa, where communal violence appeared to have held Patnaik in a pincer grip last year, the Bharatiya Janata Party has been decisively routed and Patnaik’s Biju Janata Dal has won a majority in both the Assembly and parliament elections.

So the only pattern you can see in the election is of hope -- that the global recession will not bite too deep in India, that there will be jobs and income for more people, that universal healthcare and education will begin to glimmer a little brighter on the horizon, that India will take its place as a “soft power” – a concept that Shashi Tharoor is pushing.

The former UN diplomat donned veshthi and angavastram to ride to a decisive victory as a Congress candidate in Thiruvananthapuram. Although he is not, age-wise, a true “digital native”, Tharoor has been adept at using the newest tools of communication. He has regularly transmitted campaign updates from his “TwitterBerry”. “Still sinking in – a majority of over 100,000 votes!” he relayed on Saturday. So Tharoor, and Jyotiraditya Scindia, Jitin Prasada, Milind Deora, Sachin Pilot, Priya Dutt, and Deepender Hooda form the storm-troopers of the revitalised Congress.

Indeed, in picking its younger candidates the Congress moved decisively to jettison some of its older war-horses who carried way too much baggage – the likes of Arjun Singh and A.R. Antulay. Here it differed from the BJP, whose leadership looked too old and set in its ways. The voters firmly hammered down the overweening arrogance that much of the old political class displayed – across party lines. And they gave some the fright of their lives – P. Chidambaram won by an embarrassing 3,354 votes in Sivaganga.

In the end, people seemed to want to see a return to modesty, even a bit of humility, as they recoiled from the brazen declarations of assets that candidates made when they got their tickets – humble servants of the people whose wealth multiplied by long strings of zeros from one election to the next.

So here you now have a woman whose marble likenesses rear up like poison mushrooms, and a Communist power couple who have never stood for election, or the wily caste-based politician from a Gangetic state who once made it to the Guinness Book, and a chain-gang of murderers, rapists and gangster chieftains who either manipulated the criminal justice system or put their wives or other proxies up – and they have all been humbled in one way or another.

“The trouble is that there are too many old leaders who will not let us do anything,” Manmohan Singh told me quietly in a 2006 conversation. It was a long flight from Delhi, at the mid-point of what was to be his first term as prime minister. “There is so much to do.”

This election has answered Manmohan Singh’s prayers, but there is indeed a lot to do. The Congress manifesto listed several action points – a growth budget within 45 days of taking power, Right to Food legislation, expanded education spending, and an ambitious plan to link every village in the country to a broadband network within three years.

“Rapid growth is an essential condition for getting rid of poverty,” Singh told a group of editors just before the campaign started. He noted that the economy had grown an average of 8.6% over the past five years and population growth had slowed to 1.6%. “If we can sustain that pace, in ten years we will double national income.” In the end, that is what counts for one-sixth of humanity.
(This piece appeared in Khaleej Times on May 20, 2009)