Why the government needs to lose weight... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why the government needs to lose weight... 

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In this issue:
» Why China needs its services sector to grow
» GST needs to be implemented as soon as possible
» Who is driving the US stock markets?
» Does increasing the minimum wage rate make sense?
» ...and more!


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00:00
 
Having qualified employees who are contributing to growth is the biggest asset that any company can have. Most companies in the private sector constantly monitor progress. So that those who not up to the mark are asked to leave. Hiring is done only if there are necessary requirements. All with the view of improving employee productivity and thereby containing overall costs.

The government, however, does not seem to believe in this. Otherwise what would explain the fact that even when its finances are stretched, the size of the government keeps increasing? As per an article in the Economic Times, in the current financial year, the government has budgeted to spend over Rs 1.15 lakh crore in salaries, allowances and travel bill to 34.1 lakh employees. These are people employed in various Ministries, government departments, regulatory and governance bodies. A 5% cut will result in a saving of nearly Rs 60 bn.

Interestingly, there is not much of a difference in the number of employees around 10 years back and now. This has been on account of a freeze on fresh hiring for the past several years. However, it has increasingly depended on contract workers for odd jobs. This has only added to expenditure. Further, costs have also risen. This is because there are too many people doing the same job when not required. So for instance, although regulatory bodies such as the Securities and Exchange Board of India (SEBI) (for capital markets) and IRDA (for insurance) have been set up, the government has not eliminated these respective divisions from its own set up. The other issue is the misallocation of manpower. So while on one hand, you have too many people catering to one particular field, critical areas such as healthcare, education and infrastructure are facing problems of acute manpower shortage.

One of the major fallout of the global financial crisis was the massive job layoffs in companies and sectors across the world. When the going got tough, the top management resorted to cutting down costs. Trimming staff was one such feature. Now the Indian government has also been confronted with a slowdown in the economy. Not just that, it has been struggling to bring its fiscal deficit down as it has not been able to garner sufficient revenues to bridge this gap. So it is quite clear what the government needs to do. But whether it has the willingness and the commitment to do so remains the big question.

Do you think that trimming employee costs will help the government to improve its finances to a large extent? Please share your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
 
One of the reasons for the slowdown in the Indian economy has been the poor performance of the manufacturing sector. Indeed, as today's chart of the day shows, India's industrial production over the last 6 months leaves a lot to be desired. Other than the sharp spurt that was seen in October 2012 and which could be attributed to the festival season, production has been steadily declining. This is in contrast to its peer China which continues to show healthy growth in industrial production cementing its position as the world's manufacturing powerhouse.

Data Source: The Economist


02:16
 
What next for China? We all know how it has been the biggest success story of the past couple of decades. Indeed, by being a manufacturer to the world, it has taken rapid strides along the path of economic progress. However, to maintain the same pace of growth, it may have to change its strategy going forward. Simply because the economies that it used to supply to are unlikely to get back to their glory days in a hurry. Secondly, one can only buy so many manufactured goods with one's income. Thus, as incomes in China go up, people will find they have very limited options for spending their steadily growing income on.

Enter services sector we believe. Growth in the Chinese services sector will not only provide employment opportunities to people evicted from its manufacturing sector, it will also give more avenues for the Chinese citizens to spend their fattening paychecks. There has no doubt been development on this front. But the pace is hardly encouraging. The typical country at China's income level has close to half of its workers in services. But China had just 35.7% of its population in services in 2011. Hence, how fast and how well China manages to employ more of its people in services would greatly determine its fate in the next few years as per us.

03:01
 
A good way to avoid tax evasion is to simplify the structure. Have just one uniform rate and make a system that ensures that everyone pays this rate. This is what the Goods and Services Tax (GST) attempts to do. It is a system which removes all other forms of indirect taxes and has just one uniform rate. The way it works is that the tax is to be collected at each stage of purchase and sale in the supply chain.

The idea behind the tax is good but its implementation is getting delayed again and again. Why? Because the state governments and the central government have not reached a common ground on the subject. The States feel that they will lose a large part of their tax revenues and naturally they don't want this to happen. But it is something that is necessary if the economy has to grow. As per a leading financial daily, even industrialist Adi Godrej thinks that the GST needs to be implemented as soon as possible. When asked if 2015 would be good enough for its rollout, he strongly states that it would be too late. In his opinion the policymakers simply need to sit down and sort out their issues. And they need to do this soon. GST would help the economy by boosting the growth by nearly 1.5 to 2 percentage points. It would also help in giving the much required boost to exports.

03:39
 
When do stock prices go up? Usually, that should be either when earnings improve or earnings are expected to improve in the coming future. But what if stock prices keep going up without any of these things happening? That's a sign of trouble. This is exactly what is happening in the US stock markets. US stock indices have shot up to a 5-year high. And that too, without any significant improvement in fundamentals!

What is driving the markets then? A better question would be to ask who is driving the market. The answer is none other than the US Federal Reserve. How can a central bank prop up stock markets? Pump loads of easy money into the financial system and keep interest rates close to zero. Such low interest rates discourage investors from saving their money in fixed income securities. As a result, they are forced to put their money in high-risk assets such as equities.

Over the last five years, the US Fed has pumped in more than US$ 2 trillion through its various QE programs. Such artificial liquidity injections have taken the stock markets soaring. This is a definite cause of worry. This is the reason why Mohamed El-Erian, the CEO of PIMCO says it's time to book profits. In fact, he envisages a stock market crash akin to the one witnessed in 2008-09. Just to recall, the Standard & Poor's 500 Index dropped 45% during this period. If the market indeed crashes, the US policy makers would not have too many tools at their discretion this time

04:15
 
Take an economy that's growing at a very tepid rate. Add to this an unemployment rate of 7.9%. What do you think would be a great way to boost people's incomes? The President of the US has an idea. He has proposed increasing minimum wages from US$ 7.25 to US$ 9 an hour.

It doesn't require any expertise to figure that this is an extremely counterproductive idea. Already when employment levels are worrisome, increasing minimum wage rates would only make things worse. In order to get going into the workforce, unskilled workers need a first job. But a hike in minimum wages would make employers wary of hiring workers. Employment opportunities would further decline.

The sharpest criticism on this matter comes from Mr Peter Schiff, CEO of Euro Pacific Capital. As per him, what really needs to be done is actually the opposite. There is a need to lower the cost of hiring people. And that can be done by lowering taxes and regulations. In fact, he even suggests that the minimum wages should be abolished. We kind of think that this would be a good idea. For markets alone should determine the price of labour. All that the Government should do is ensure that system is fair and equitable.

04:45
 
In the meanwhile, the Indian equity markets traded below the dotted line during the post noon trading session. At the time of writing, the BSE-Sensex was down by nearly 30 points. Stocks from the healthcare and information technology spaces were amongst the top performers, while those from the metal and engineering spaces were amongst the top underperformers. Asian markets ended the day on a weak note with China, Hong Kong and Japan down by 1.6%, 0.9% and 0.3% respectively.

04:56  Today's investing mantra
"In my early days as a manager I, too, dated a few toads. They were cheap dates - I've never been much of a sport - but my results matched those of acquirers who courted higher-price toads. I kissed and they croaked" - Warren Buffett

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    12 Responses to "Why the government needs to lose weight..."

    USAEconomist

    Feb 21, 2013

    Your analysis as to why Indian manufacturing has fallen off a cliff, leading to a slow economy and inadequate government revenues and a huge CAD, is very poor....you offer no real analysis. The key to manufacturing growth is:

    LOW INTEREST RATES: Monetary policy is almost irrelevant in todays globalised eceonomy where capital arbitrages multiple markets at the speed of light.

    Hence, the RBI is foolish to slaughter the Indian manufacturing sector (with all the attendant dosorders that follow, including a free falling ruppee as the India growth story evaporates and inflows slow down) just to attempt to control the price of food and fuels....both of which are entirely uncorrelated to interest rates.

    Drop interest rates to the 5% level and watch how inflation falls, GDP takes off, CAD dissappears, ruppee strengthens, unemployment drops....etc etc

    DROP INTEREST RATES! Its outdated economics ....get some real experst into the RBI and fire the dinosaurs.....

    Like 

    vinod agarwal

    Feb 20, 2013

    Our govt. should just think of itself as another Greece. The legacy cost of its emplyees via the future pension bills, already bloated, will be a disaster for future generation, who will be taxed more and more just to pay for the then past and present employees.

    Like 

    DILIP AICH

    Feb 20, 2013

    Our Current Govt is only interested to fill their own and family coffer by the Tax Payer enjoy. They enjoy all the free benefits to them which is authorised but the benefits which are not authorised for their families are also taken by them which is totally unethical. Govt make the public life problatamic by different means. As example the current UIDAI (AAdhar) card where the Date of Birth?Age could have been written instead writting the Year of Date of Birth. Now Govt want to make another card in the name of NPR, these are only to make the money for themseleves and making the system and life of others easy. Is their anybody who looks to all these? Why not Govt make one card as UIDAI with DOB, PAN NO, Addressess, Identification Mark alongwith the recent Eye and Finger Prints? I believe if it is done then only one card will suffice all the required information for the Identification and as well as tracing the person if needed be any reason, also this can be made with sedcurity coding by which that will make a proof of Citizenship also and can be made compulsory for all financial transaction, address proof, voting etc.

    Like 

    Jayvanthy

    Feb 20, 2013

    The AG's Office has done some excellent jobs in unearthing scandals. Kudos to it.
    It could simultaneously start a Cost audit for evaluating the usefulness of Employees in Govt. Depts. It should make specific recomendations for the staff reqt of these Depts. As You have rightly pointed out, there are several Depts. with different Govt. bodies doing the same work, so much so that very often the Common Man is running from pillar to post to get little clearances. Such a waste of good resources that could be used for Developmental Investment!
    These audits should be available for Public Consumption, as it is the Taxpayer's hard earned money which is being squandered by the Government.
    The IAS or other Babus would otherwise never make any serious attempts to reduce their staff!

    Like 

    athmanathan

    Feb 20, 2013

    Why the government does not think about appointing a committee to know the facts on redundancy and duplication of work. Efficiency should be the motto of any worker and he should be monitored to see if he delivers his job on time. Several vacancies in rural health centres and a large number of teaching vacancies are yet to be filled up. Both the centre and states are equally responsible for this sordid state of affairs.

    Like 

    Leonard

    Feb 19, 2013

    I fully agree with you. I live in rural Karnataka and the youth clamour for government jobs because they get the job and the forget about work after that!

    It is time competancy takes the place of complacency in the government. Only then can we move forward

    Like 

    abhay Dixit

    Feb 19, 2013


    Remove all PF, Bonus, health benefits, pension etc and make it part of salary by adding it to the salary. This will make the comparisons and working simple. Govt can save money by scrapping these departments.

    Employees can save and provide for annual events, retirement, medical benefits based their own assessment-- requirements. Min wage can adjusted accordingly.

    Like 

    Prasad

    Feb 19, 2013

    In the name of losing weight / trim down employees is not at all a solution. It is also not so simple as said.

    - Why should employees be terminated in the name of cost cutting. Are they not part of GDP or economy. Will it not add to more unemployment. Government requirement and projection of man power, recruitment, training etc is itself a time consuming process. Then how can the requirement change so suddenly. The money spent on this process cannot also be wasted.

    - Government should put effective redeployment of its man power by redistribution to various departments where shortage is there. When more departments are created, taluks are created, then redistribution of employees should happen, if necessary even from clerical cadre to top administrators without any gender bias so that the strategy will not be weakened.
    - Reduce departmental heads by merger of departments, which will ensure proper man power distribution, effective technology utilization, short training's to ensure employees to cope up with new their role and postings.

    - If we look at politics - are the number of MLAs, MPs are increasing or decreasing. Are more ministerial berth is created or reduced to bring down cost. Why don't we question it?

    - Simultaneously, merge some of the ministries. For effective control create new ranks say Dy Ministers but with independent charge of those merged ministers who will report to the new set up of Minister so that it will lead to reductions of man power as repetitive work of same in different ministries will get reduced, besides result in effective executive decision at various department levels as related departments will fall within one minister. Some of the things done in the past by unnecessarily increasing departments or ministries will be undone, so that the cost will necessarily come down.

    - The final question is whether there is necessary Political will and Executive decision making capacity left in the present Democratic set up to achieve the cost cutting efforts and simultaneously improve effective services to the common public?

    Like (1)

    Balakrishnan R

    Feb 19, 2013

    Dear Sir,
    Per employee cost of government comes to less than Rs 40,000/- per month. This is reasonable. Only number of employees required is to be checked.

    Like (1)

    Borkar

    Feb 19, 2013

    Certainly this is reqd to be done at the fastest possible way. There is no laid down -forget the words well - procedure/practice to measure the productivity of majority of Govt/semi govt employees. The papers are lost at a fantastice and efficient speed. I recollect some 30/35 years back I gave my driving licence at the counter. I was asked to wait. After waiting for more than 2 hrs. I enquired about it. And lo, the licence was not traceable. Recently, I went to Rationing office to get my ration card to be transferred to another city. After many promises of probable delivery dates. the office could not locate my application. After submitting application for the second time. Many visits could not produce any result. While hoards of people (collected by local well wishers of parties) were getting their ration cards afresh,) my number did not come. I finally gave up collecting transfer certificate as it was required to get gas connection at the new city. The decision taking authority is probably at the 4th/5th higher lavel, but the clerk holds (sometime the peon) the paper for the reason best known to him. Put the computers in that place, register every paper recd and the person responsible for disposing it will take action within five working days and if he cannot decide, the reasons thereof must be recorded. U at this single stroke can eliminate 3/4 levels which are really not required. This is not something I am talking through my hat. It has been tried when the computers were not there. It can and must be tried. Only what is reqiured is strong will to do. But inter onnected and layerd vested interest based on the caste creed and politcal connections willnot allow any progress in this respt.- Borkar

    Like (1)
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