Will India Remain Trapped in Aamdani Atthani, Kharcha Rupaiya mindset?

Jan 18, 2017

In this issue:
» Is a rate cut on cards after benign inflation?
» Revival in private sector investments crucial for economic growth
» Market roundup
» ...and more!

00:00Chart of the Day

Madhu Gupta, Research analyst

The long-delayed goods and service (GST) tax will see the light of the day in July this year. Hopefully.

The GST reform - waiting in the wings for 16 years - is touted to provide a much-needed boost to government coffers. With the economy ailing from a slowdown, higher tax intake would support government spending at a time when private investment has come to a virtual standstill.

As India Inc remains stuck under loads of debt and low capacity utilisation levels, fresh investments have been hard to come by. Even public sector banks, overwhelmed by huge amounts of corporate loans turning bad, have not been eager to loan to this segment.

In such times, the government needs to step up public investments to break the vicious cycle and revive economic growth. But the high government deficit is becoming a millstone around its neck.

Sample this: India's government deficit to GDP ratio is higher than most G-20 countries. Therefore, any attempts of relaxing fiscal consolidation to spur demand must be weighed carefully.

India Runs a High Government Deficit Among G-20 Countries

The low tax intake appears to be responsible for the high government debt and deficit levels. But a more careful analysis shows this is hardly the case.

India's government revenues accounted for 21.4% of GDP in 2016. This is much less than the average of 36.4% in developed countries. But the comparison is deceptive considering India's per capita GDP of US$6,658. Per capita GDP in the UK and US was US$42,513 and US$57,293 respectively in 2016. In other words, tax earnings in an emerging economy like India have a lot of catching up to do.

One redeeming factor is that India's revenue share of GDP is higher than Southeast Asian countries such as Malaysia, Indonesia, Thailand, and the Philippines, though slightly lower than China's 27.7%. But the government's expenditure share of GDP, at 28%, is also well above the average for the region.

Is India's High Government Spending Benefitting the Economy?

And despite running a high government deficit, India continues to lag socio-economically with a widening gap between the rich and the poor. As per Credit Suisse's Global Wealth Report of 2016, India is the world's second most unequal country after Russia.

Therefore, government spending in India is sub-optimal and the intended beneficiaries are not being targeted well.

For example, my colleague Vivek Kaul has written about how the Food Security Act fails to provide food security. In fact, Vivek has written loads of articles about grossly inadequate socio-economic government policies and programs. He even recently wrote a book that critically evaluates the governance of successive governments since independence. From the front cover:

  • In India's Big Government, Vivek Kaul questions the apparently honest intentions under the garb of which the government approaches its policy-making and implementation.

    Whether its infrastructure, primary education, agriculture, manufacturing and industry, banking, taxation, employment, labour or welfare, Kaul holds the mirror up to modern Indian governments ever since Independence.

    And it's not a pretty image to behold.

    He delves deep and covers a lot of ground in making the case for an India that does not deserve the government that it has, an ambitious government with a questionable track record and one which Indians have quietly accepted till date.

    But things may be reaching a tipping point now, and Kaul convincingly makes the case that the government needs to totally reform itself before it leads India to disaster.

    India's Big Government is a must read for anyone who has an interest in India's, and therefore their own, future.

The book is India's Big Government: The Intrusive State and How It Is Hurting Us. Now I know you are very excited to get your hands on this book right away. That's why I recommend you sign up for Vivek Kaul's Diary, a free newsletter that is usually published thrice a week. I know for a fact that Vivek's readers will get preference when it comes to claiming a personally signed hardbound copy of the book.

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India has been fortunate with the collapse of the international commodity prices in the past few years. With the prices now stable, there is an expectation that inflation could continue to remain lower this year as well. According to an ICRA report, the key factors that will affect inflation include impact of Goods and Services tax (GST), upcoming monsoon, Rupee-US dollar exchange rate and commodity prices. Inflation numbers have come in lower for the month of December 2016. This is primarily due to currency demonetisation, which has impacted the economy and also has hit consumption.

The monetary policy committee in its last meeting indicated to operate with an inflation target of 4% for the year 2017. This would mean the committee would have a limited scope to cut rates in the near future for the fear of stoking inflation. However, with the country facing a consumption shock and a lull in its private investments, reduction in repo rates could be used as a signal to stimulate the economy. We think It will be a tough choice for the committee to make.


The Profit Hunter Workshop will be on the 22nd January at the Taj Mahal Hotel. Apurva will share his experiences in trading and even more importantly will show how to spot profitable trades in the market. Apurva recently urged his subscribers to go watch Dangal! According to him, wrestling and trading are similar. Trading is a dangal between bulls and bears.

You can read his complete article here. Don't miss the chance to interact with Apurva and pick his brains at the upcoming conference.


There is talk of stimulating the Indian economy by increasing government expenditure. A pickup in private investments seem like a distant dream and a private consumption is adversely hit. The hope is that the government should support economic growth by spending more. This is troubling since the government is already weighed down by debt and is also struggling to meet its deficit targets.

Vivek Kaul raised the problem with India's economic growth and shed light on the key factor impacting economic growth:

  • If we take government expenditure out of the equation, how does GDP growth look like? The economic growth for 2016-17 comes in at 5.2%, which is the lowest in half a decade...

    What this tells us is that the economic growth in 2016-17 is likely to come in at 7.1%, primarily because of the government expenditure forming nearly one-third of the incremental GDP.

    The trouble is that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely. At the end of the day, the government has a limited amount of money at its disposal. If India has to continue growing at greater than 7%, then private sector investment needs to pick up. And that doesn't seem to be happening currently due to various reasons.

Over the past few years, a steep decline in crude oil prices did not translate into a similar drop in prices for consumers of petrol and diesel in India. The reason being that the government increased taxes levied on such products. Thus, earning additional revenue and disproportionately benefitting from the softer crude prices.

However, with crude prices on the rise. This no longer seems to be a feasible plan for the government.

Vivek Kaul, after a lot of research has written on the government's role in segments like infrastructure, education, manufacturing, banking, employment, etc. Vivek has questioned the decisions, policy-making and implementation plans of the government. He has come out with a comprehensive book, "India's Big Government-The Intrusive State and How it is Hurting Us". It is a promising book and a must read. To order your own copy, watch this space closely!


After opening in the green, Indian equity markets are trading marginally higher. At the time of writing, BSE Sensex was trading higher by 145 points and NSE-Nifty was trading higher by 49 points. Sectoral indices are trading on a positive note with stocks in the metal sector and capital goods witnessing maximum buying interest.

04:55 Today's Investing Mantra

"People always ask me where they should go to work, and I always tell them to go to work for whom they admire the most." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Rohan Pinto (Research Analyst).

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1 Responses to "Will India Remain Trapped in Aamdani Atthani, Kharcha Rupaiya mindset?"

Vipul Gor

Jan 19, 2017

India Per Capita GDP $6658 ? Total GDP $2 tr, divide it by 125 cr population, comes to $1600. Pl clarify.

Equitymaster requests your view! Post a comment on "Will India Remain Trapped in Aamdani Atthani, Kharcha Rupaiya mindset?". Click here!
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