Is declining utility of honest politicians hurting India? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is declining utility of honest politicians hurting India? 

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In this issue:
» Will the new disinvestment target mean more PSU IPOs?
» Will fiscal deficit target hurt banks' profitability?
» Subsidy reduction target ambitious?
» Oil prices set to soar: Roubini
» ...and more!


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00:00
 
Last week was quite an eventful one in India. The railway budget was presented. The Economic Survey was presented. And the Union Budget was presented. Interestingly the railways budget was for once more popular than the Union Budget. And that too for all the wrong reasons. It highlighted the innate problem in the Indian political system. This is the problem of declining economic utility of honest politicians.

Allow us to elaborate further on this. The Railway Budget came into the limelight as the Rail Minister sought to increase fares. Though this raise was minimal, the thought process was in the right direction. He said that the fares had not been increased for 10 years but at the same time, the operational costs had shot up multi-fold. This rate hike was thus essential for the long term survival of the Indian Railways. He was applauded by the ruling government but cursed by his own more populist party. And in the fight between reformist and populist, the populist won and Mr Trivedi was forced to resign.

In the next few days after this drama, the economic survey was presented which projected hunky dory predictions for India's economic growth. The survey counts on fiscal consolidation to drive this growth. But unless the government comes up with serious reforms to its ridiculous spending policies, this is an impossible task. As per the survey, investment has suffered due to a drought of administrative action from the government. But if every administrative action will be reversed due to the fear of losing party support and voter bank, then how can we expect investment growth to revive? Again the brilliant GDP growth projection relies on getting the fuel prices right. But the government will not decontrol diesel prices or put any measures in place to control power and fuel theft.

So it is quite clear that the one and only obstacle to India's growth is not the 'general macroeconomic depression' that even the Finance Minister was happy to use as an excuse. The only obstacle is politicians themselves. And that too the vote hungry populist kinds. They are the ones who prevent the comparatively more honest ones from doing their work for the country.

Do you think the government is the biggest obstacle to India's growth? Let us know your comments or post them on our Facebook page / Google+ page.

01:35  Chart of the day
 
That the current Budget has done nothing for individual income tax is not news. Income tax slabs have been changed but the quantum of savings for the individuals on the tax front is expected to be miniscule. But when it comes to tax the Budget has not really helped the corporates either. The tax incidence actually decreases as the profits before tax increases. The highest effective tax rates are being paid by the smaller companies. This has generally been the trend in the country. But Budget 2012 has actually increased the incidence on tax paid by the smaller companies. As a result, the big and more profitable companies would continue to pay lower tax rates. Talk about unfair advantage!

Data source: The Mint

02:00
 
As far as disinvestment is concerned, FY12 was a terrible year for the government. Against an ambitious target of Rs 400 bn, the government was able to raise only Rs 140 bn. Weak market conditions were one of the reasons why follow on offers were put on hold. Thus, the government could not bank on stake sales to bridge its fiscal deficit gap. Despite this, stake sales do seem to be an integral item on the government's agenda. In his recent Budget speech, the finance minister has once again set a steep target of mopping up Rs 300 from PSU stake sales in FY13. Apart from the follow-on offers, the government may choose to use share buybacks, crossholding among state-run companies and auctions to dilute stake in companies it runs. Further, during FY13, the disinvestment department will focus on companies where the government holds more than 90% stake. Thus, the government intends to start early in this regard. This means that we could see a slew of PSU IPOs coming out this year. But like any other IPO (Initial Public Offers), the key here will be the price at which the issue is placed. Investors have become more cautious and issues that are exorbitantly priced will only dampen investor appetite and will render the efforts of the government to raise funds quite meaningless.

02:50
 
To the common man, the Finance Minister's concerns over wide gaps between tax collection and government spending seem alien. For both higher subsidies and lower taxes seem necessary for better living. However, that a wide fiscal deficit could eat away other opportunities as well does not dawn upon them. Take the concern highlighted by the chairman of a PSU bank for instance. If the taxes are not collected from tax payers, the only option left to the government is to borrow and spend. This way it can bridge the differences in its cash flow to some extent. However, excessive government borrowing impacts interest rates and private borrowers get crowded out. This in turn also impacts overall credit growth and the economy. Thus the humble fiscal deficit may not worry everybody alike. But will certainly impact all with its influence on credit costs.

03:20
 
Last year, Finance Minister Pranab Mukherjee had set an optimistic fiscal deficit target of 4.6% of GDP (Gross Domestic Product). That target just remained on paper. As reality caught up, the country's fiscal deficit zoomed to 5.9% of GDP. But people seldom learn from history. For the financial year 2012-13 (FY13), the deficit target has been pegged at 5.1% of GDP. Now, there are two key ways to the achieve that. One is, of course, by increasing revenues. The other one is by cutting expenditure. Given that subsidies form a significant part of the government's expenditure, it is almost impossible to lower the fiscal deficit without reducing subsidies. For FY13, the FM has set a subsidy target of less than 1.75% of GDP. That is significantly lower than FY12 numbers which stood 2.5%. It must be noted that for FY12, the government's subsidy bill overshot by a whopping Rs 730 bn.

Subsidy on petroleum products was the biggest culprit for the massive jump in subsidy. In the last year's Budget, the government had assumed an average crude price of US$ 90 per barrel. In actuality, the price averaged much higher at around US$ 115. The recent Budget seems to be assuming a price of US$ 100, whereas crude prices are already hovering around US$ 125 per barrel. With tensions escalating in the Middle East, it is highly unlikely that crude prices would match with government's assumptions. And that's not all. The Food Security Act will also lead to a high subsidy burden. Any fifth grader who knows simple arithmetic would point out that the subsidy target is highly ambitious. So either the government is plain stupid, or trying to fool all of us.

04:10
 
Oil prices are rising again. This time, it is the conflict in Iran over its nuclear program fuelling the crude. Whether an armed conflict takes place or not, as far as oil prices are concerned, the fear of the same itself is a reason good enough to drive prices dangerously high. So believes Mr. Nouriel Roubini, the Chairman of Roubini Global Economics. And we couldn't agree with him more. We all know that crude prices are quite inflammable, and start boiling even on the slightest hint of speculation. Despite damp sentiments revolving around the global economy and its outlook, the prices of crude have consistently been above the critical US$ 100 per barrel. And a big reason for this is the ongoing Iran issue. High oil prices seem inevitable riding on fear premium due to possibility of war itself. And if history is anything to go by, if actual war happens, it could be a precursor to another global recession.

04:45
 
In the meanwhile, the Indian stock markets continued to languish after opening the day on a weak note. At the time of writing, BSE Sensex was down by 138 points (0.8%). Stocks in the information technology and realty space were leading the losses. However, FMCG stocks were witnessing buying interest. The other major Asian stock markets closed the day on a mixed note with Korea and China closing in the green while Taiwan and Hong Kong ended the day in losses. Europe has opened the day in the negative zone.

04:55  Today's Investing Mantra
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." - John Templeton
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23 Responses to "Is declining utility of honest politicians hurting India?"

SUJIT BANERJEE

Mar 22, 2012

Since 1947 Congees have brought this country to hell and now has reached its peak. Scams all round-have given birth to Lootera's like Lallu(JD),Mulayam(SP),Mayawati(BSP),jayalalita(AIADMK),karunanidhi(DMK),and many in BJP + those Comrades of CPM .
Maoists are the Gratest Threat of this country-not those who has LOOTED this country and stashed their money is Swiss Bank. Mamata another LUNATIC if have so much love for the POOR people of this country should FAST untill death in front of Parliament.Very good - her poor people have the Birth Right to occupy Foothpaths(as promoted by CPM) on streets to earn their livelyhood forcing people to walk on the street and get runover by vehicles.She will get a SOLID kick on her back in next election by the same people who gave her the scope this time not because people have any love for her but to teach CPM a GOOD lesson which she has not realised.These Congees are going to be kicked out by 2014.But Anna hazare has spoiled the Peoples movement.

Like 

r v iyengar

Mar 21, 2012

The budget for the common man has been disappointing tax-wise.
As you point out, the fiscal deficit has to be reigned in and the only way is to increase taxes. The FM has done it in a way by raising the service tax and excise duty by 2 % each. The extra sum he garners by these measures is of the order of 40000 crores. if I remember right.
The subsidies are a necessary instrument for the survival of the poor. It takes a size-able amount out of the budget.
If the subsidies reached the deserving recipients in totality, it could be welcome by the average Indian, for it is reaching a poor fellow Indian.
Unfortunate part of it is that most of it is leaked away and a major beneficiaries are the ruling class and their henchmen. The poor continue to live a miserable life while politicians/ and hangers on of all hues are getting richer hitting an enviable CAGR of 100 % in their wealth every year.
The fact to lament is the Govt has done precious little to change this scenario. The laws are not stringent enough and the implementation is lax. The punishments, if at all,are not exemplary and the criminals are emboldened to continue their activity.

Like 

ajit potnis

Mar 20, 2012

As far as economic growth is concerned, yes they are obstacles. But they are facilators when it comes to growth in corruption, communalism. black money, crime to name a few

Like 

Albert

Mar 20, 2012

The politicians, who think that they are somehow above the teeming masses, are and have always been the bane of India. They are the ones who are stymieing the progress of the country and its people by continuing to siphon off the nation's wealth into myopic programs designed to garner votes and keep them in power. If the same wealth was re-invested into nation building, we would be rivaling China now. Instead we are at the bottom of the scale on virtually every social measure. We can't even trust the govt to hold up its end of the deal which is evident from retroactive law changes to suit its purpose. First they tax our incomes and then they tax our expenditures in form of sale/service taxes. When that money is wasted through subsidies, populist schemes and scams, the govt cries "fiscal chaos" and raises taxes to make the shortfall. If this is what democracy is all about, then I prefer a benevolent dictatorship like UAE or Singapore.

Like 

DR.SHARMA

Mar 20, 2012

the other day andhra pradesh governer spent one hour in Tirumala stopping all the devotees in legitimate que and enjoyed his illegitimate darshan of Lord Balaji unmindful of old sick pregnant women children and mothers with babies.this is the respect they have for ethics.the beauty is peoplr protested bur it did not pinch him.I know Lord Balaji must have credited into his account a billion sins and will ordain him to hell ROURAVA.poor fellw does not know this.will some kind soul tell him?
no ehics for darshan of God and you expect honesty in people?
bur let me say when Pranab visited the temple he had a darshan of Lord Balaji in five minutes and left.may his tribe increase

Like 

R.Varadarajan

Mar 20, 2012

The root of the problem is non accountability. We will only be discussing the shocking status of our democracy and the great harm due to complacency. It is high time we reconvene the Constituent Assembly and seek guidance for quick implementation of Electoral reforms, Judicial reforms,etc within atime schedule along positive reccommendations for an India where all are treated equally and positive uplift of economically weaker section only instead of caste, provincialism and regionalism

Like 

Dalip Singh

Mar 19, 2012

Root cause of ills affecting our country is due to politicians.This is the reason why millions of Indians are strongly with Anna's movement.

Like (1)

R.S.SINHA

Mar 19, 2012

I fully agree with the comment that the immoral act in apex governing machinary in GOVT. hurting the NATION.Leaving patriotism apart most of the politicians are running after power &money.

Like (1)

krishnan

Mar 19, 2012

Unfortunately it is not only the politicians who are corrupt but it also everybody else if the opportunity comes.(of course there are exceptions)people attend Anna Hazare rallies and then go about breaking every traffic rule without even a second thought !So it is almost I am ok but the rest not ok.Criminals repeatedly get elected but the electorate only wants benefits for themselves and to hell with the nation.We have become a nation of hypocrites.patriotism is talked about maximum but observed the least.That the nation is still progressing(?)is because of the intelligence of the people.

Like (1)

G R CHARI

Mar 19, 2012

In India there is no creature called honest (sic) politician; even if we have one, they are incapable of delivering results or changing the economic landscape of the nation - our own PM is a standing example. The politicians are only interested in the loaves of power and clinging on to their office. The scarce resources of the country are looted under dubious schemes and subsidies and porous laws. Though we say our economy is liberalized since 1991-92, it is still commandeered by the govt. in order to feed it's political borough. Every one knows the problem, but what's the solution? And even if we have the solution, where is the leadership to bring about the desired change? It's really a zero-sum game for the hapless and teeming down-trodden Indians. Under the present political set-up, the majority of Indian population is condemned to a life of deprivation and degradation. Voting-in & voting-out of govt. is no solution.

Like (1)
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