The dog that did not bark - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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2 MARCH 2013

One can't help but notice that, for the past several decades, all expert commentators give Union Budgets a rating of 8 or above, out of 10, (not wanting to offend) and then wonder why, if we have had decades of good Budgets, with, presumably, good economic policies, we are always in a financial mess. Future Finance Ministers ought to state that they would welcome constructive criticisms of their proposals, for, obviously the ratings of 8 + are as misleading as some of those from rating agencies!

So this column would concentrate on the 'dog that did not bark', or the things he didn't do but ought to have. Sherlock Holmes solved one of his famous murder cases based on the clue of the dog that did not bark.

Subsidies, which have been around since we got independence, accounted for 24% of gross tax revenue for 2011-12; they were 12% in 2007-8. The increase was Rs 145,000 crores, which ate up nearly half the increase in gross tax collection of Rs 308,000 crores during this period.

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There would be no problem with subsidies if they went to those who need them. But they don't. Most of the spend is eaten away by middlemen, or spent in the administrative expense of disbursing them. As per Wikipedia "Overall, a 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. As much as 39% of subsidized kerosene is stolen. On the other hand, India spends relatively little on education, health, or infrastructure. Urgently needed infrastructure investment has been much lower than in China." (See here).

That, then, is a dog that did not bark. Instead of spending more on education, to help provide jobs, and on infrastructure, to enable the setting up of enterprises that would create them, and on health, to ensure that the workforce remains healthy, India has, since independence, been increasing the spend on subsidies, a lot of which is eaten away. Isn't it better to teach a man to fish?

The reason for this is that all political parties use public money to promote their parties. They have belaboured under the misconception that voters will cast votes in their favour, happy with the crumbs dropped their way through subsidies. But the trend in recent elections shows that voters would rather have good governance, and jobs, which will give them a loaf of bread instead of the crumbs. Perhaps that is the reason, other than practical reality, that the Budget has not been a populist one, with lots of giveaways.

The practical reality is that, thanks to the continued spending of tax revenue, and then some, the twin current account deficit and fiscal deficit are unsustainable.

The Finance Minister, Mr P Chidambaram, has shown containment of the fiscal deficit at 5.2% this year (less than the 5.3% expected) and at 4.8% next year. He has not explained how he has been able to do that, after the two main items he was depending on, didn't deliver as much. One was sale of telecom spectrum, which failed miserably, because the minimum price for the spectrum was pegged at a level the market was unwilling and unable to afford. It was expecting Rs 40,000 crores from sale of spectrum, but got a few hundred. It was expecting Rs 30,000 crores from divestment of shares, but got perhaps Rs 24,000 crores. The inability to sell spectrum at the reserve price also severely erodes the figure of 'notional loss' to exchequer, of some Rs 170,000 crores, which the CAG had put up, and which kicked off the sequence of events which messed up the whole telecom sector.

There is a dog that did not bark to explain this. Although it exhorts companies to follow best accounting practises, the Government of India itself does not do so. It accounts for expenditure on actual basis. So it is simple for GOI to show a lower fiscal deficit by simply postponing payment of subsidies to April. This is chicanery.

How has PC managed to contain the fiscal deficit estimate for 2013-14 to 4.8% of GDP? This, despite a 28% hike in plan expenditure?

This is based on several assumptions. A huge benefit is presumed from a reduction in petro product subsidies, by raising petrol prices (already raised) and diesel prices in a graduated manner. The underlying assumption is that crude oil prices remain at or below $ 110/barrel, else the subsidy would rise.

The FM has, to discourage use of petro products, whose import drives up the current account deficit to an unsustainable 5% of GDP, raised taxes on gas guzzling SUVs and import of luxury cars. This is a step in the right direction. But why has the Government still not introduced fuel efficiency norms? USA did it after the first oil shock, we have not done it more than 30 years later!

Not only should we introduce strict fuel efficiency norms, and tighten them year by year, in order to compel automakers to think innovatively, but we must set up efficient public transportation systems as well, and reduce dependence on private transport.

In the rail budget one superfast train has been introduced, but at speeds far below those in other countries like China. Now, superfast trains are not a luxury item as made out to be. One recalls a BBC documentary one saw perhaps thirty years ago, which talked about city planners in Tokyo trying to find ways to decongest the city, where house prices had become unaffordable, thanks to the people migrating to it in search of work. It is the same issue for our cities like Mumbai.

One of the solutions was to have faster trains, so that people could stay farther away and spend the same amount of time on commute. So a capital outlay on a rail network of high speed trains can actually help set up satellite towns near job pulling urban centres, and bring down real estate prices in those centres.

Why is this not being done? Turn to the dog that did not bark! A lot of unaccounted money of policy makers, made through graft, is parked in real estate, and so, bringing down prices would be detrimental to their wealth. The graft collected has also to be whitewashed, which is done by showing it as agricultural income, which is tax free (and is kept tax free for that reason). The FM has said he wants to widen the tax base, but has not contemplated including the super rich farmers in it. If super rich individuals earning over Rs 1 crore annually can bear a 10% surcharge, why should super rich farmers not also be asked to contribute to the nation? They do get lots of benefits in the form of subsidised fertilisers and free electricity and tax free income. The dog that did not bark is that agricultural income is the washing powder that whitens the graft money.

That is why, although there is a 1% TDS on sale of property valued at over Rs 50 lacs, in this Budget, the FM was very quick to point out that it did not apply to sale of agricultural land. George Orwell's Animal Farm is alive and kicking in India.

Another laundry for black money is the FII route, used for roundtripping via tax havens which, like Mauritius, have double tax avoidance treaties with India. Which is why, the statement in the Union Budget, that the production of a tax residency certificate by an FII would not be sufficient for it to claim exemption under the double tax avoidance treaty, was reversed the next day. FIIs had sold aggressively after that statement, and the sensex had dropped 290 points on Budget day.

The FM has introduced investment allowance at 15% for investment in projects of over Rs 100 crores; however, the major employment providers are small and medium enterprises investing less than Rs 100 crores. Also, it seems contradictory to give an investment allowance tax incentive on the one hand, and take back, through MAT (minimum alternative tax) on the other.

For India to get onto a sustainable economic growth path, the Government would have to severely curtail subsidy spending which is not targeted. One hopes that direct transfers provide efficiency in such social welfare schemes.

One also hopes that the suggestion made in these columns is, somehow, accepted. Namely that a small part (say 5-10%) of the amount spent should be borne by the parties that voted in favour of it, in proportion to the votes. This would act as a small brake on the tendency to equate tax revenue, obtained from the tax paying public, with party funds, to be used to try and garner votes.

Perhaps such spending schemes ought also to come with an expiry date. That the schemes would end in, say, 5 or 10 or 15 years.

One further thought is why our Parliament cannot pass a law, as the US Congress has done on its debt ceiling, under which compulsory expenditure cuts, called sequestration, come into force once the debt ceiling is breached. In the US these are likely to come into force very soon, and will lead to automatic spending cuts of some $ 85 b. in the remaining seven months of this year.

Last week the stockmarket was spooked by two events. The first was the election results in Italy, which led to a hung Parliament, hence uncertainty, hence worries about its ability to repay its debt. Global stockmarkets fell, indicating how intertwined we all are to global events. The second was the Union Budget, which was uninspiring about what the Government would do to spur growth and provide jobs, murky on how fiscal deficit would be contained at the levels forecast and confusing about the treatment of FII investments routed through tax havens.

The BSE Sensex lost 398 points, to end the week at 18,918, and the NSE-Nifty fell 130 points, to end at 5,719.

The sensex finds support around the 18,300 levels and can bounce from there. The driver of the stockmarket is investment by Foreign Institutional Investors (FIIs). The driver of FII investment is QE3. Last week global markets were spooked on reports that QE3 was being phased out. That was retracted, and markets rose again.

So it would be Bernanke, not PC, who would be driving the market. If Bernanke closes the tap, the party would be over. The question is, when.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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8 Responses to "The dog that did not bark"
K.Madhavan
Mar 5, 2013
1.There is no mention of recovery of black money in budget.
2.There is no attempt to discourage dieselisation of private cars.
Like 
Prasad Oak
Mar 4, 2013
Once again a spot on analysis of the situation and you've reflected a common investor's sentiment on this year's budget!

However, there is one thing I noticed over last few months that you have repeatedly insisted on the need of fuel efficiency norms. The US and EU geographies have imposed them at manufacturer level (i.e. minimum FE across portfolio of all vehicle offerings). I personally think India does not need corporate FE norms, because the market forces are doing their job. Since the Indian mentality is "kitna deti hai", every manufacturer is forced to provide at least 1-2 vehicles with "ultra-high" FE. With every new breakthrough in vehicle efficiency, any global player will think of India as a prime market (for instance Ford EcoBoost engine). Even if manufacturer level FE norms are imposed, I believe 90+ percent of the manufacturers will comply on day 1.

Fully agree with rest of the observations though!
Like 
S.N.BHUSHANAM.
Mar 3, 2013
Yes, there has been progressive and increasing political infiltration in all walks of life ,particularly,in channels where Govt.'s largess is to be distributed.But what about controlling the seen and unseen bleeding of the massive investments --large chunk of nations wealth, in the PSUs?Since these form the CORE/BEDROCK inds.all the inefficiencies get passed down making the nation increasingly noncompetitive in international levels--EXPORTS STAGNATE/GET POOR REMUNERATION ETC ETC.I AM SHOCKED THAT THERE IS NO PUBLIC OUTCRY/SOCIAL PRESSURE BUILDING UP.WHAT THE INTELLIGENTIA,PRESS,JUDICIARY ARE DOING ABOUT??? WHAT YOU ARE DOING ABOUT THIS??? Like 
Sreedhar Krishna Murthy
Mar 3, 2013
This is an excellent summary of the union Budget and the deceit behind it! It is yet to be seen how the deficit is going to be met - by mobilising higher revenues on account of economic revival or by cutting expenditure on several vital schemes which were announced in the speach which got claps from the tresury benches. Mere announcement does not mean anything unless some one is sincere in its impementation. IPC and CRPC are there for centuries to deal with criminals but have we caught all the thieves? Whether it is Rape Law or Lokpal Bill, unless there is a dedicated machinery and political will at all levels to enforce them strictly, the Law would be worth the paper on which they are printed. The announcment about "all Ladies Public Sector Bank" is nothing but a gimmick. How does it help unless it caters to the needs of women and women enterprenuers? In Bangalore we had an all WOMEN COOPERATIVE BANK even 25 years before! These are merely cosmetic touches given to an aged wrinkled up face! As u rightly pointed out, taxing super rich is Ok, but what super rich FARMERS, WHO GROW MONEY IN THEIR FARMS and launder them as "WHITE" are not taxed. Farm is a fertile ground for ploughing in illegal money and launder them. There is an urgent need to tax them. But who will bell the cat. While the small and marginal farmers are struggling to survie and make a living, the rich farmers from "farm houses" are roaring in affluence. " the Farmer" is treated like holy cow, the rich farmers and money launders are reaping the benefits. No one is dare enough to even think of taxing farm income, despite the reports of many expert committees Like (1)
Shishir Lall
Mar 3, 2013
Very well written Jawahir....you have a very good appreciation of economic issues & better still you offer practical & fair suggestions. I enjoy keeping myself updated through your articles....you have to find a way through the political compulsions of our decision making class to have your 'good for the country' suggestions implemented or else I see our economy hurtling downwards. Like (1)
rj
Mar 2, 2013
If Bernanke closes the tap the US stock market will crash.
The 401k's that have just regained 2008 levels, more or less, will tank. The public will cry out, I hope,and Obama will be hounded. He has successfully got the stock market manipulated so to speak using Ben who is supposed to be neutral.
Sequestration that was originally Obama's push is now being shunned by him publicly.The republicans now refuse to go into private meetings with Obama because as they say, he goes back on what he discusses in private.
So Obama is president of politics and not president of the country.
Anyways if India can have real budget cuts, not phony ones like the sequestration in the US it would be helpful.
Like (1)
rajesh goel
Mar 2, 2013
sir very good article, each and every word is true to the indian economy and its politician. look like my own voice and feeling about it all. Like (1)
madhav ranade
Mar 2, 2013
boss, you hv hit the nail on the head .... but of what use .... these politicians with thick skins ..... nothing hurts them except .... loss of power ..... Like (1)
  
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