Yet again the govt threw away taxpayer money... - The 5 Minute WrapUp by Equitymaster
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Yet again the govt threw away taxpayer money...

Mar 6, 2013

In this issue:
» The US dollar is here to stay
» Hazards of China's reckless growth
» Impact of cheap money on American middle class
» Massive drop in debt burden of developing countries
» ...and more!

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Most Indian taxpayers feel that the Union Budget is not for them. Whether you are salaried, self employed, home maker or retired, few Budget provisions impact you directly. Rarely do any impact you positively. But if you are a farmer or farm owner, budgetary provisions have something for you year after year. Ever since India was an agrarian economy in the 1950s our politicians decided to favour agriculturists. Seven decades later, when we are service driven economy, the country's tax policies have remained unchanged. No politician has dared to breach the topic of tax on agri income. In fact newer sops are awarded each year in the name of Green Revolution. That makes one wonder as to why do scores of farmers commit suicide each year. Where does all the money go? Most of us already have the answers. But Comptroller and Auditor General's latest report bares the facts like no one ever has. The CAG report calls the UPA government's popular 2009 farm loan waiver scheme a Rs 520 bn scam!

No, it is not that the CAG is the first one to smell the rat in this case. In fact, this scam should have been one of the first to be unveiled by CAG. Chiefs of PSU banks have been crying hoarse about the piling up of bad loans due to loan waiver scheme for three years. Ever since the scheme was rolled out, PSU banks that were in perfectly good health saw their asset quality worsen. Even the subprime crisis of 2008 did not do to banks in India what the 2009 loan waiver scheme did! Now the government wants to compensate by recapitalizing the banks. Once again throwing away taxpayer money at them!

As for the small farmers who were supposed to benefit from the scheme, very little has changed. As per the CAG report, 37.3 million farmers were given debt relief worth Rs 522.6 bn under the scheme. But in 22.32% of the 90,576 cases checked by the Auditor, ineligible farmers were given benefit. The deserving ones kept reeling under the burden of debt, in the event of a poor harvest.

Unlike the telecom, coal and Commonwealth Games scams, this one has had a scathing impact on not just economic but also India's social well being. It cements the fact that the government's populist schemes benefit no one but itself. Worse, since the Union Budgets are backed by very little mathematical and logical explanations, promises are made out of thin air. It is time the Finance Ministry puts up the math for financing subsidies before asking taxpayers to shell out more! It is time the FM gets more accountable!

Do you think taxpayers should ask for more accountability from the Finance Ministry? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
Insufficient power capacities to energize India's growing infrastructure needs has been one of the biggest hurdles for India in recent years. Problems in land acquisition, poor coal supplies and non paying state electricity boards have all added to the mess. But if one takes a look at the installed plant capacity and generation of power over the past seven decades, we have not done too badly. While the installed power capacity has grown at a CAGR of 8%, power generation has grown at 8.8% average annual rate over this time frame. But the momentum of growth has slowed down. Both capacity and generation grew at around 10.5% between 1951 and 1971. The growth between 1971 and 1991 averaged at 8%. In the last two decades (1991-2011), the annual growth rate dropped to 6%. Hence one wonders if India's power generation will be able to keep up the growth momentum if the economy is to stage a recovery in GDP. Lack of proactive policy measures for power sector could derail India's recovery attempt.

Data source: Economic Survey 2012-13

It's been a while since the battle line was drawn. But the intensity refuses to die down. In fact, it keeps getting stronger by the day. We are alluding to the controversy over whether the US dollar will lose its status of the reserve currency of the world? Or will it continue to reign supreme for many more years to come? We must say that the arguments seem to be equally strong on either side. Those who predict the dollar doom point to the relentless money printing that is underway and also to the falling contribution of the US dollar denominated assets in the forex reserves of a large group of nations. Dollar supporters on the other hand do not forget to highlight that there is hardly any currency that can consider itself a worthy successor to the dollar. What more, even the oil is traded in dollar terms. And as long as these two scenarios continue, the US currency will remain the undisputed leader. It is of course true that there is no imminent threat to the dollar. But what can also not be ignored is its steady debasement by the central bank. Little wonder, we keep on advising our readers to hold a small percentage of their wealth in the yellow metal gold. For it is the best hedge in the uncertain times that we seem to be living in.

China has grown at a stupendous rate between 2005 and 2011. But this growth has come at a price. Most of this growth has largely been investment driven, exports driven and reliance on inefficient state enterprises rather than the private sector. And while these problems did not really come to the fore during the boom years, they are becoming a spoke in the growth wheel now. In fact, as the outgoing Chinese premier pointed out, the country has been expanding blindly. And this has led to issues such as overcapacity, pollution and financial risks. A weakened global economy and rising labour costs have challenged the country's hitherto strong model of low cost, export oriented manufacturing. The good thing is that the Chinese government realised this and therefore made a wish list. This included goals such as focusing more on quality rather than quantity and domestic consumption over exports. But while making a list is all very fine, the real challenge for it is execution. And how effectively it will be able to address these problems will finally have a bearing on how China's growth will pan out in the coming years.

The world economy has gone through a paradigm shift post the 2008 financial crisis. The developed world is still reeling under the burden of debt and recession. But have you ever wondered why the developing countries have been relatively less hurt by the crisis? One must keep in mind that a couple of decades ago the developing world was the most vulnerable to crises and defaults. So what has changed now? The answer is lower debt burden.

As per an article in Businessweek, the average developing country had an external debt worth a little more than its GDP in 1990. But this has fallen dramatically in the subsequent decades. In 2011, the average external debt to GDP ratio slipped to 42%. In fact, less than 1 in three developing countries had a ratio more than 50%. This is indeed commendable. In comparison, the Eurozone has gross external debt of about 125% of GDP.

What has led to this massive drop in debt burden in developing countries? Three main factors are responsible for this change. They are reform, relief and economic growth. Some of the important reforms included deficit reduction, a shift towards market interest rates and competitive exchange rates. Debt restructuring and relief also helped. And most importantly, robust economic growth in the last decade resulted in lower debt burden. For instance, developing countries as a whole reported a 79% GDP growth from 2000 to 2010. It seems the developed economies have lots of lessons to learn from the lesser developed ones.

The once stable American middle class is now fraught with anxiety. They are seeing their paychecks shrink and their grocery bills expand. Ideally it should be the other way round. But the severe recession in the country has forced most of them to take home lesser pays. The ones with full time employment are seeing pay cuts or flat salaries. Others are seeing pay hours being slashed down as companies are trying to economise their cost structures. The ones looking for jobs have to make do with whatever they get as unemployment in the 'middle class job arena' is still high. And to top it all, the US government has rolled back the tax breaks and made healthcare costs mandatory. This has shrunk the people's paychecks even more. We hope Mr Bernanke realizes sooner than later that this is the class that he is trying to woo. Especially to boost consumption rates in the country. Printing cheap money is just making the lives of American middle class worse by the day.

India is witnessing acute coal shortage. This has impacted the power generation plans of India. And understandably so. Right now, approximately 57% of India's power generation capacity is based on coal. Thus, shortage of coal is bound to impact the power generation. Lengthy process in getting clearances for new mines has impacted coal production. Also, transportation bottlenecks have impacted the availability of coal. Shortage of railway wagons is the primary reason behind it. As a result, India has decided to move towards clean energy mechanism. There are ambitious plans to tap other energy resources like wind, water, solar etc. However, the share of coal is likely to remain unaffected. And this can be said from the fact that even in 2030 approximately 52% of India's power capacity will still come from coal. This is just marginally lower than 57% figure persisting currently. Thus, it can be said that India's power generation aspirations are heavily dependent on coal. As such, government must take steps to increase the production. If not, India will continue to remain a power deficit country.

Buying interest in commodity, engineering and realty stocks have kept the benchmark indices buoyant since the start of trade today. The key indices in Indian equity markets opened on a strong note today and kept up the momentum. The BSE Sensex was trading higher by around 85 points at the time of writing. Other major Asian stock markets closed higher while markets in Europe opened flat to positive.

 Today's investing mantra
"A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results." - Warren Buffett

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    17 Responses to "Yet again the govt threw away taxpayer money..."


    Mar 8, 2013

    Our economy is totally muddled by the bad policies of successive governments. The policies are populist and are aimed at garnering votes. Implementation has always been porous with scope for middlemen to take away large chunk of the benefits.


    Suresh Kabra

    Mar 7, 2013

    Budget has two sides- revenue & expenditure, and execution of policies enumerated in the budget. Divestment to reduce current account deficit, is applauded by many. But, in fact, it is similar to a rich landlord who is not making enough income, is resorting to selling his assets to meet his household expenditure. Unless the landlord learns to manage within his income by cutting down WASTEFUL expenditure, selling of assets will sooner or later lead to bankruptcy. This happened to all royal families after Independence who did not reduce their expenditure or used their assets to generate revenues. Hence,the FM must ensure that wasteful expenditure is reduced by downsizing govt machinery, freebies to ministers and officers,like foreign visits, oversize security apparatus as status symbol to name a few. Poor execution of policies in distribution of subsidies, mostly results in EASY MONEY to politicians, bureaucrats and their families. It is a sad state of affairs, when the FM expects us to pay our tax honestly when they themselves are involved in scams after scams. This can reduce only if the FM makes public, on monthly or quarterly basis, statement of expenditure and allows NGOs, media and social workers to verify their execution on ground in addition to CAG. This transparency will make the entire system more accountable.


    p v k sathyanarayana

    Mar 7, 2013

    Increase the number of taxpayers. Once we have the %age of taxpayers moving into double digit, any such act of wasting taxpayers money would rake a public outcry. Get the Service providers pay small amount of tax(panwallas, dhobi walas and others) for inclusing and increased public monitor/review of use of taxpayers of money.


    sunil kumar

    Mar 7, 2013

    excellent piece of information.kindly give some insight as to how an non resident indian can invest in indian stock market.

    Like (1)

    Mitesh Patel

    Mar 7, 2013

    My view we should stop such schemes instead give money to the needed and ask them to do work which good for country. Work should start from village if villages are good cities will be good they will work for making village good for whcih they will be paid they will have good environment to live and get money which will make country grow and they will get money against work. No money without work so all will progess our TAX PAYER money utilised proper

    Like (1)

    A E Charles

    Mar 7, 2013

    No steps have been taken to prevent flow of our money into the swiss bank account nor any measures to have the accounts declared for those who have stashed the money away

    Like (1)

    HG Sharma

    Mar 7, 2013

    CAG's finding is just an official endorsement by a constitutional body , of an open secret.An ultimate farmer ,who toils in the fields to produce food for the nation has always been overtly exploited ,let it be Zamindars or foreign ruler or our own governance through their political parasites and corrupt government machinery,a real farmer has always been the sufferer.In the name of democracy we have democratized corruption.Earlier a few used to exploit, now every link in the chain exploits, and still calling themselves the saviors. A few honest at top have always failed to deliver as they are all sitting on a heap of corrupt machinery, They are all elected by `We the people of India`.Unless we change nothing cognizable will change.

    Like (1)


    Mar 6, 2013

    Definitely. Just as the gov has decided to tighten the grip to ask the taxpayers to file IT thro' online as mandatory, the taxpayers too should demand complete accountability by the finance ministry for the disbursement and expenditure in order to have a closer look to prevent such scams in future. An e-mail should be sent to all taxpayers on tax revenues and expenditure year in year out by the FM compulsorily.

    Like (1)


    Mar 6, 2013

    It is the honest tax paying citizens are the one's who are made to feel like fools when there is no accountability for the tax money paid. No wonder why people don't pay taxes.

    Like (1)


    Mar 6, 2013

    It is not only the FM, bul all the ministers are to be made accountable. Even the PM should be made accountable for all the unwanted govt spending. What about the crores of taxpayers money spent in the name of security to our politicians and their families. This is a spineless govt with full of corruption. Donot have the willingness to bring out the black money stashed outside India.

    Like (2)
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