Jas Business Blog

There has been a huge uproar on the fuel price rise suggested by Pranab Mukherjee, Indian FM, in the annual budget presented by him. Though many would want to bring out the daggers and shout against him, I would like to support the league of these sensible men. Knowing that Pranab was rated as one of the best five Finance Ministers of the world for the year 1984 (in days when nobody knew about India, and reforms was a word yet to be discovered), I do like to understand him before I pass any judgment on him.

To understand the rationale behind this, let us have a quick look at the macroeconomic indicators of India and government policies in last few years which are precursor to this. Indian economy is already ailing from the “populist policies” and tons of economically misaligned subsidies. The projected fiscal deficit of 2009 has been put at 10.3% of our GDP which would be among the highest in the world. The consolidated debt-GDP ratio is estimated at 76.6 per cent in 2009-10 compared to 61.0 per cent in 1995-96 and 70.6 per cent in 2000-01. This clearly points out at the widening gap in debt and GDP which would be one of the top priorities for any FM of a country. Mind it that Greece, which  was in news recently for sovereign debt crisis, has  2009 budget deficit at 12.7% of GDP. The debt to GDP ratio defines the ability of a country to service its external loans and tweak its production to have more exports if needed. Needless to say, we are in red or orange at best.

One would argue that India is not a capitalist country and hence it has to bear the burden of the social debt to subsidize the basic necessities and also spend more on social projects as no private sector would do anything in non profitable options. Infact the power, water and fuel (automobile as well as cooking) subsidies have been there on this account itself. Many would argue that the India has 42% of its population below the international poverty line, hence these subsidies are necessary; but then along with any subsidy we need to also calculate what actions need to be taken to eradicate the problem and define the deadlines to remove these subsidies. The surging economic growth in pockets has already created a differential development rates in India. The people who should ideally use these subsidies would be poor, most of whom are in villages. Ideally the subsidies should have lessened the woes of these villages but the reality is far from this. Agriculture and allied sectors like forestry, logging and fishing employed 60% of the total workforce in 2007, whereas they accounted for a meager 16.6% of the GDP (same year). The Prime Minister’s Economic Advisory Committee in its latest estimates has projected that during the current financial year, agriculture sector could experience minus 2 per cent growth.

Subsidies have had more political background than economic. The Indian government subsidizes many industries and products, from gasoline to food. Loss-making state-owned enterprises are supported by the government, water is free and paid by the state and farmers are given electricity for free. Overall, a 2005 article by International Herald Tribune stated, Indian subsidies amounted to 14% of GDP! At the core of subsidies is kerosene which is supposed to be a poor person’s cooking fuel. But reports confirm that as much as 39 % of subsidized kerosene is stolen. The stolen kerosene goes to small industries, into petrol adulteration and some also use it for liquor, subsidized one!

On the other hand, India spends relatively a little on education, health, or infrastructure. Urgently needed infrastructure investment has been much lower than in China. According to the UNESCO, India has the lowest public expenditure on higher education per student in the world. No wonder that India’s vast subsidies have been severely criticised by the World Bank as increasing economic inefficiency.

And the consequences? The oil marketing companies are likely face a loss of Rs.40,000 crore in this fiscal year for selling auto and cooking fuels at a subsidized rate domestically. The huge subsidies of power has resulted in rich farmers exploiting it, people using motors to pump out the water in huge quantities, hitting the water table. The groundwater levels are plunging at alarming rates in Punjab and Haryana. The storage of water in the Indus basin reservoirs was a massive 39.12 per cent below the storage figure on the same date last year.

PSU retailers are projected to lose Rs 45,571 crore on selling petrol, diesel, domestic LPG and kerosene below cost. State-owned Indian Oil, Bharat Petroleum and Hindustan Petroleum sell fuel below cost on the orders of the government and expect a revenue loss of Rs 46,030 crore on that account this year. Of this, the government will be meeting only Rs 12,000 crore, petroleum minister Deora has explained. In case the fuel price is not increased, the above PSUs are in danger of getting bankrupt.

To avert bankruptcy, the Kirit Parikh panel has suggested freeing auto fuels from government control along with a steep hike in cooking fuel. The experts group, headed by former Planning Commission member Kirit Parikh, recommended deregulating of petrol and diesel prices, while raising kerosene and domestic LPG rates by Rs 6 per litre and Rs 100 per cylinder, respectively; which ofcourse would not happen.

Prime Minister has already said  that the impact of the rise would not be much anyway on inflation. The current inflation is not demand driven but supply driven, hence there would not be a proportionate increase in inflation. Monsoon would play a very important role to increase the supply. Still if the power is misused and spent away unwisely, the irrigation sector would not get its fair share and that will again decrease water supply; not to mention already lowered water table which would necessitate water pumps and capital for it, making it all a vicious circle.

The only way out is to remove subsidies with a defined time line and state governments, especially Punjab and Andhra Pradesh, to get some common economic sense and a sense of nationalism too instead of greed for political power.

Simply put, to remove the mess we are creating we need this price increase for now and much stronger economic policies, esp at state level, to reach the development growth we all are already thinking of having attained.

Sources of data:

• http://www.expressindia.com/latest-news/Govt-talks-fuel-price-hike-with-allies/578092/
• http://netindian.in/news/2010/02/19/0005416/pms-panel-economic-growth-exceed-72-2009-10
• http://www.businessworld.in/index.php/Indias-Inflation-Blues.html
• http://en.wikipedia.org/wiki/Subsidies_in_India

Insane.. just plain insane…!

Picture this, you are just strolling around in the supermarket and stumble upon a grey sweat shirt. Just a plain sweatshirt in a plain Grey color that you can find in any nook and corner of downtowns in winter. You leisurely pull the price tag and see this:

That is right, this plain sweat is worth 2.765Billion dollars!

In case you are still with me, and have not fainted, let me explain the horror. It is the Zimbabwean dollar being talked about, the nation that has seen the largest ever hyper inflation ever where the worth of a currency note is less the cost of making such a note. In February last year, the annual inflation rose to more than 100,000 percent and the local currency tumbled to a record low of 25 million Zimbabwe dollars to one US dollar.

Reason for hyperinflation
If you ask me, its mediocrity itself on part of government thinking. The Central Bank prints too much money to pay for government expenditures. When the government notices prices are rising, it responds by issuing even more money. And this goes on till the money revolving in economy is so much that one ends up paying 3 billion for a sweat shirt!

Problem is not just with prices, its also with the amount of notes you need to buy things. So bank needs to print the currency of higher denomination and that is how Zimbabwe has come out with currency notes of 1 million, 10 million, 500 million, 1 billion and so on. You would expect some monetary and fiscal reforms to correct this, but instead the policy that Zimbabwe government came out with was that in August 2008 the Central Bank of Zimbabwe introduced a new currency slashing all zeroes. But as the right demon was not encountered, two months later they were back at 10,000 notes and it won’t be long before the old notes may be re-used. It was reported that annual inflation reached 231 million percent in July last year.

So how does it look like now?
Bad.. real bad! See this, you can not carry a plastic card for transaction to most of the places, so you need cash, and hell lot of cash!! Just wads and wads of cash! See the images below:

The million dollar baby

The billion dollar baby - who says money does not bring happiness? See this! You would end up laughing!!

What? No body is looting this kid?

Do not mis jusge this guy, he is just going to supermarket to buy vegetables

Time to pay the bill, open the almirah!

The new currency notes - these have last 10 zeros removed and stones signfy the heaviness

But who will tell them that the inflation has not stopped. So here we are, this is what we get to buy from new notes

Back to square one - bank had to start issuing 50K notes again and before its too late, we will again have the one billion dollar note coming back to life

Why? Why ? Why the hell Mr. Mugambe ?!!!