The Indian consumer story is not lost

It is strange that the day one of India’s leading financial newspaper chooses to print a bearish front page warning of the “Storm of Worries” that lie ahead in its growth trajectory based on qualitative responses, a very bullish (and almost real-time) data point gets hidden and lost in the same publication’s Page 12.

Indirect tax revenue collections rose 46.2% in April Y-o-Y, from Rs. 32,661 crore to Rs. 47,747 crore.

Table 1: Indirect Tax Revenue Collections in April 2015 by segment

Indirect Tax Component	% increase Y-o-Y	Nominal Value
Customs Collections	23.6%	Rs. 14,286 crores
Service Tax Collections	21.2%	Rs. 15,088 crores
Central Excise Collections	112.3%	Rs. 18,373 crores

Increase in the collections of indirect tax revenues speaks to the strength of the consumption power in the country. Customs collections speak to the strength in imports whereas both service tax revenue and central excise tax revenue speak to the domestic consumption of services and goods. The potential of the Indian consumer is highlighted in this data release especially given the magnitude of the increase and the fact that it occurred in April. Historically, April has seen weak collection numbers owing to higher tax payments made in the month of March resulting in refunds being issued in April.

A portion of the increase in service tax revenue collections can be attributed to the increase in the tax rate from 12.36% to 14% in the budget for FY16. However the tax rate has increased by 13% whereas the service tax revenue collections are up 21.2%.

The staggering jump in central excise collections is especially surprising given that these numbers were announced following data on retail inflation being released. Retail inflation in India eased to 4.87% in April, the lowest it has been this year. Both this and the consumer food price inflation numbers came in below analysts’ predictions. Consumer food inflation slowed to 5.11% in April from 6.14% the month before. Last April retail inflation and consumer food inflation came in at 8.38% and 9.21% respectively. Therefore the pickup we see in this year’s collections is not a result of price increases. There will definitely be an element of consumers using more cards in transaction or asking for a receipt of their purchase diminishing the consumption with unaccounted for cash (which cannot be taxed by the government). However that cannot be the only factor contributing to the magnitude of this increase.

The government has been able to generate such a growth in tax revenues despite having VAT and other indirect tax rates be lower than other major economies in the world. Only Switzerland and most states in the US have a tax rate lower than India’s.

Table 2: VAT Rates around the World

*USA does not prescribe tax rate at a federal level but at an individual state level.

Source: IBFD Tax Research Platform

With the publication prophesizing the storm and HSBC downgrading India to underweight, this crucial data point maybe overlooked or be considered the peak before the fall. However the marginal propensity to consume is lower in India than in other major economies and consumption still accounts for a lower percentage of the GDP (approx. 55%) versus the 70% witnessed in the US or the UK. With rising incomes as well as rising propensity to consume, indirect tax revenues will also continue to rise.

This is one of the better ways to track the strength of the consumer in India and would remain a key metric going forward. 

Fiscal prudence lost with the new budget

The people of India voted in change however the Budget for the first financial year of the new government’s tenure lacked the change. The budget presented in the house today for the most part lacked a clear direction and seemed like a chaotic presentation of some good and some confused ideas. Given India’s precarious fiscal situation- controlling deficit and inflation would have seemed like the most obvious goals for the new government to work towards however this was not the case

Excessive and disorderly infrastructure spending

The total budgeted expenditure for 2014-15 is 12.9% higher than the revised estimates for 2013-14. The government aims to increase its net tax revenue receipts by 16.9% this year which can only be seen as a gross over-estimation. The minimal direct tax reforms including the increase in the income tax slab by INR 50,000 or increase in the investment allowance for individuals is unlikely to raise the tax to GDP ratio. It is not a laffer curve issue with the Indian masses but rather the lack of a crackdown on the abundant tax offenders in the nation. The all-cash/ black money economy will not be tempted to convert and start paying taxes with an increase in the income tax exemption limit.

The government will set up Infrastructure Investment Trusts (InvITs), a modified REITs type structure for infrastructure to reduce the pressure on banking for infra as well as increase fresh equity available for the same. Infrastructure however for the most case is depreciative in nature and public infrastructure rarely functions on the given time schedule. The cash flow from these projects would be a distant reality dampening the allure of such a product.

The most disheartening sight in all of this is however the excessive government spending on public infrastructure undertaken in a disorderly manner in an inflationary environment. The government for example is awarding 16 port projects this year with spending INR 116 billion on a single harbor development project itself. This is despite the total traffic being handled at these ports witnessing a decline for the past two years. With not a sizeable increase in export production the construction of 16 ports seems mistimed. The focus on roads (INR 378 billion expenditure) is however welcome for a nation finally looking forward to building a manufacturing sector.  Developing inland waterways and roads provides the manufacturers with much needed transport infrastructure. These domestic networks need to be prioritized over international transportation avenues and fiscal prudence would suggest that the latter be saved for later. Maintaining the fiscal deficit at 4.1% of GDP is not likely to be a reality.

Inflation remains uncured

With such immense government spending lined up for the coming financial year, price stability will be a distant reality. In an emerging economy facing an annual inflation rate of 8% and with 29% of the population staying below the poverty line food affordability remains a major concern. The budget however lacked any provisions to deal with the 30% of annual grain production that gets wasted in India due to poor warehousing facilities.

Barring a minor cut in customs duty on imported apparel, small TV’s and other non-essential consumer products there was not much relief for the Indian consumer. The government additionally imposed a 5% excise duty on imported met coal and a 7.5% duty on imported flat rolled steel (to deal with idle Indian steel capacity).

Select sectors receive attention however the ‘wow’ factor was missing

FDI cap was raised to 49% (from 26%) in defense manufacturing and insurance sectors of the economy. The management however is to remain completely Indian. The rationale for increasing the cap in defense is to counter the flow of foreign currency reserves brought about by the large amount of arms’ imports in India. The defense budget has also been increase by 12.4% this fiscal year. Reforms in the rest of the industrial sectors or for the business environment in general are missing.

The government’s recognition of the need to implement for a unified, central sales tax code in India and the conclusion of the debate around it is welcome. The business community however hoped for a clear deadline for when this new regime would be in play. The hopes for a streamlined tax administration were however not fulfilled in this budget. This was the ‘wow’ factor that businesses were waiting for that would have increase the ease of doing business in the nation.

Good developmental intentions are marred with misplaced allocation

There were several new initiatives undertaken by the government in developing the human capital of the nation. This was however not expected to be the focus of the budget. The budget had more welfare undertones than expected, even though a lot of the initiatives were marred with misplaced allocation. The starkest of these distinctions can be seen in the fact that the cause of girl child (and her education) received only half the money the construction of a statue warranted (33 million USD). The most upsetting fact in this allocation would be the fact that the state government had already spent 16 million USD on this statue.

The good intent of the government was however visible in the healthcare allocations announced. The focus on TB care (the pathogen is said to be present in 95% of Indians) shows the health ministry’s focus in containing a disease that affects almost all Indians. Construction of new All India Institutes for Medical Sciences coupled with the new government central drug regulatory authority will help enhance the quality of healthcare in India in a systematic, focused manner.

The expenditure (INR 5 billion) on training programs and motivation for teachers in primary education is crucial in improving the dangerously bad quality of teachers in public schools in India. The creation of new IIT and IIM (technology and management institutes) is however a populist move. These institutes are regarded as the best in the nation however with quickly deteriorating quality except for in a few locations has diminished the brand value of these schools. Other subjects that needed impetus in higher education were once again ignored by the Indian government.

The above stated are only a few of the developmental projects undertaken by the government with its new budget. The immense amount of spending and promised spending by the government makes a fiscal deficit of 4.1% this year, 3.5% in 2015 and 3% in 2016 seem like an impossible dream.

Women’s empowerment and economic development

Word of caution: I am not a feminist. I am simply trying to be an economist.

Despite India being a “richer” country than Bangladesh, having a per capita GDP of 1509 USD (2011) as compared to the per capita GDP in Bangladesh of 735 USD (2011), Bangladesh has fared better than India in reducing poverty. Bangladesh saw a 3.2 percentage points annual decrease in multi-dimensional poverty (MPI) in 2004-2007 as opposed to 1.3 percentage point decrease seen by India in 2003-2006. The difference lies in women’s empowerment- both political and financial- between Bangladesh and India.

The difference in the level of the empowerment of women in Bangladesh and India can be demonstrated by a lot of factors, but two of the major causes for the same are the reservations of seats in parliament and financial empowerment of women via micro credit schemes. The constitution of Bangladesh mandates reserving 45 of 350 seats (12.8%) for women in the national Parliament however the Indian government has been unable to pass the women’s reservation bill calling for 33% reservations for women in the Lok Sabha. This mandated reservation of parliamentary seats has led to higher representation of women in the Bangladeshi parliament. Furthermore both the leading political parties Awami League and BNP have female leaders in Sheikh Hasina and Khalida Zia respectively. In a country where the party system is seen to be “two top down organizations with upward loyalty being the sole criteria for political participation” the leader of the party has an influential say in the policies they support. Considering both leaders are women, it is only natural that they support policies leading to further empowerment of women, thus such is the nature of the policies that do get legislated.

Political empowerment of women in India has not achieved any such successes at the national level. The women’s reservation bill was introduced in parliament in September 1996; however it still struggles to be passed. The current representation of women stands at a measly 61 seats of a 552 Lok Sabha seats (11%) in a country where women account for 48.4% of the population. The political empowerment (or lack thereof) factors in greatly in computing the GII which I use to explain the difference in poverty reduction rates between the two countries.

With political empowerment of women, comes more social freedoms for women and hence a higher chance to seek education and employment leading to financial empowerment. The argument I would like to make here is that with their empowerment women are able to lift themselves out of poverty as well as the future generations they mother because as they are more prone to focus their expenditure on the health and education of their children. This facilitates the future generation to secure a brighter future, one that would not entail them living in poverty.

One of the only microfinance/ grant provision made to women by the Government of India is the National Maternity Benefit Scheme (NMBS). Under this scheme Rs. 500 is given as a subsistence grant per pregnancy to women of poor households for pre-natal and post natal care for the first two live births. Given the male dominated governance and bureaucracy in India, not only is the allocated budget underused by approximately 22% but also 20% of these grants were made to families staying above the poverty line. This shows the inefficiency and the inadequacy of this scheme in garnering women’s empowerment and consequentially poverty reduction.

Given the arguments and evidence presented above, I believe that women’s empowerment- political followed by financial empowerment- leads to a higher rate of poverty reduction in Bangladesh than in India. A higher degree of women empowerment leads to cultivation of a future generation that is better off in terms of their health and education. This thus enables them to work more effectively towards improving their standard of living and alleviating themselves from poverty. 

The Last Straw- Final Comment.

There are many people who have already lost their patience with Anna Hazzareji and there are many nowhere close to that sentiment. However, personally I lost my patience with Anna Hazzareji’s ideas after his comments on the Republic day of India. The defiance of logic and respect, in his idea of empowering the Gram Sabha above the Lok Sabha, has the potential to convince many that just as his methodology even his motive is lost now. A movement that was supposed to have been an anti-corruption, has now become an anti-government movement specifically, anti-union government movement. However my contentions with the movement are not based on that issue, for in a democracy everyone has the right to voice their opinion regarding the government and their own elected representatives. Yet, I lost my patience when it came to empowering the Gram Sabha above the Parliament.

26^th January- the Republic Day of India; a commemoration of the day on which our Constitution came into action, is the day Anna Hazzareji chose to blatantly disrespect it. The first feature we learn about our constitution is that the Republic of India is ‘federal in form but unitary in spirit’ and in case of conflicts ‘the union shall prevail’. Hence, the very idea of empowering approximately 265,000 Gram Sabhas, over the directly elected Lower House of the Union Parliament shows utmost disrespect towards the Constitution and the spirit of India it thereby tries to establish. Furthermore, the head of the drafting committee of the constituent assembly, Honorable Dr. B. R. Ambedkar while presenting the constitution to the people of the Republic of India, stated his views as to what he thought would hamper the democracy in India. Use of unconstitutional methods was his biggest fear for India’s democracy. He urged the people to abandon bloody as well as coercive methods to bring about change. This means abandoning methods of civil disobedience, non-cooperation, coercive forms of satyagraha and fast. The usage of such methods, since the implementation of the constitution is according to him “nothing less than the Grammar of Anarchy.” What defies logic the most is Dr. B.R. Ambedkar is talked of as an inspiration by the members of the Anna Hazzare Movement.

Anna Hazzareji’s major contention with the Lok Sabha lies in its inability to pass the Lokpal bill through both the houses during the winter session. He says “550 people were giving their own suggestions” and there was no conclusive action taken. So to overcome the indecisiveness of one institution of 550 people, we must empower to 265,000 Gram Sabhas with a minimum numerical strength of 7 and maximum of 17, with each of the 265,000 Sabhas having a regional interest to further prior to anything else. I wonder what an IIM graduate would have to say regarding managerial diseconomies arising from such an arrangement.

Finally a personal comment; I respect and believe the constitution of India to be one of the most comprehensive and well crafted constitution in the world. To flagrantly disrespect it on the day supposed to have been celebrated to commemorate it does not amuse me. Denouncing the acquisition of areas to be a part of Economics Zones and Special Economic Zones (SEZ’s) by the central government as being a violation of the Indian villages simple states an intensely non-progressive attitude which is not what India’s growth story needs at the moment. 

Out of context traditions and Inability to adapt- Can Gandhism really save us today?

(I would like to thank Ms. Shagun Chedda for getting me started on this topic)

There is no doubt in my mind and I am sure, in every Indian citizen’s mind that Mohandas Karamchand Gandhi, the man we Indians call the ‘Father of our Nation’, played the biggest role in assimilating the movement of the upper middle class educated barristers under the aegis of Congress, into a mass movement under the aegis of the Indian National Congress.

Following this recognition is the impending question- What would Gandhiji have done if he were alive today? Post this most reach the conclusion that we should adopt his methods and views to straighten everything that’s “wrong” in our country today. Before taking this question up for discussion, I would want to highlight what Gandhism or rather the more popular term ‘Gandhigiri’ means to the Indians in 21^st century. ‘Gandhigiri’, a term coined by a Hindi Movie in 2006 has replaced any other term that we may have used to categorize Gandhiji’s ideologies. Passive resistance (possibly the more appropriate term) has now been replaced by Gandhigiri but in doing so Gandhi has been reduced only to his method of Satyagraha that too in the wrong manner.

Satyagraha consists of two words Satya (truth) and Agraha (insistence to hold on to something, in this case insistence to hold on to the fast). It does not mean that one must use this to torment the government, or any institution or any person into giving into their demand. This method was devised by Gandhiji to fight against the repressive rulers for what the majority believed was the truth. Gandhigiri as I see it is one of the Gandhian methods, taken out of context and twisted around to suit those who wish to use it against the people in charge. Whatever happened to arguing and discussing your point out in a democracy!

But coming back to our discussion of Gandhian methods, we must note that Gandhi was a firm believer in Ahimsa; non-violence not only in action but also in terms of thoughts and feelings towards a fellow citizen. Hatred, even for those were “evil” was not acceptable because he always said ‘One must hate the sin and not the one who commits it’. Well, in today’s most famous example of Gandhigiri, The Anna Hazzare Movement, this has been surely forgotten. Satyagraha was carried on but under the aegis of this belief of Ahimsa and against a repressive rule. Applying this method in today’s India, well that’s surely forgetting the context in which it was used. This is one of the biggest problems we face in our country today. The practice or the tradition as we call it lives on but the context in which the practice itself evolved is always forgotten. Do we seriously believe that our never ending conflict with our neighboring country, Pakistan, can be ended using Satyagraha and Ahimsa? Can the Telengana issue be sorted out using passive resistance? The answer, and I trust everyone’s intelligence enough in this case, ought to be an emphatic NO. There has to be debate, discussion, active strategy to resolve issues as the conflict is now amongst ourselves and not a repressive ruler. I urge everyone to please not follow actions blindly, but to think about the context where it was first used and assess then if it’s the valid course of action or no.

Following any path blindly demonstrates our inability to adapt. Though the Gandhian principles have been adopted in our constitution under the section of ‘Directive Principles of State Policy’, should we really follow these to make India better off today?

“To organize village Panchayats”

The acceptance of the partition plan proposed by the British in 1947 relied on the belief of our leaders then that they wanted a nation with a powerful Center. We have witnessed the problems we have the state government spreading regionalism to the very core of Indian politics today. Even now should we believe that decentralization of power in India is the best approach? I am not against having Panchayats and state government. We know that are essential in administering the world’s largest democracy. However Panchayati Raj and its eventual culmination into the Ram Rajya; is this really the ideal for India as a nation today? I know, I wouldn’t trust myself with Ram Rajya for people stay just as long as there is an associated suffering with injustice that they fear. If there is no check, and hence no punishment and suffering, its only human for people to fall into devious lives.

“To promote cottage industries in rural India”

India is today considered to be a potential economic superpower. Everyone today throws around the terms growth rate and GDP very casually. But could concentration on small scale industries and cottage industries have gotten us here? Cottage industries seemed the right choice 60 years ago when in our nascent state of freedom we were trying desperately to be self sufficient. And that’s exactly what the goal of cottage industries in villages is, to make every economic agent self sufficient. But aren’t we beyond the stage where our economic goal is self sufficiency? Don’t we all talk of 10% economic growth on our dinner tables without really knowing what policies have been undertaken to attempt and achieve this?

We have to change and adapt. A policy recommendation made by Gandhiji 65 years ago cannot be relevant today, the same way a policy recommendation made today will become irrelevant within a decade. No one wants only a welfare state today. Economic growth has taken precedent over economic development and welfare in today’s world. And if we set other goals for ourselves, the world will not change for us but yes, we may lose out on the growth opportunities presented to us today. Gandhiji aimed for development and welfare first. We do not have to discard that goal but yes, we have to adapt. Economic development can be derived from further economic growth. And this is what we must do.

Out of context is out of rationale. Changing values, goals and ideologies will help us adapt to our world better. And in this globalised world, we cannot live in isolation, we have to move along with the world for otherwise we stand to be the losers, not anyone else.

Sadly, we have built immunity now.

The recent bombings in Agra for a moment upsets every Indian, but "our spirit to fight back" makes us move on. The frustration is no doubt there but it is like an annoying headache; you know it will disappear if you sleep on it. It seems that, there can be no two views, or two opinions here. Then why do I write alternatively India?

So, I am not going to post a prose/ essay on how something has to be done and all the hullabaloo that we see in the news, only for a day though, but just going to post something that was written on the day of the 13/7/ 2011 Mumbai serial blasts.

Hypocrites

-          Harini Dedhia

The Headlines flash-

“Mumbai back on its feet” and

“The Mumbai spirit fights back”

And in a momentary lapse of judgment

I applaud those sitting in the local trains

going back to work having dealt with it all.

Dealt, with it all?

Change it.

Change it to haven’t dealt with it at all.

It is good to stay in a city like Mumbai,

where no one interferes in your life

It is bad to stay in a city like Mumbai,

where no one cares for your life.

The spirits of the dead

desperately searching for “the spirit of Mumbai”.

A wasted search;

The spirit does not exist.

Oh! Just there! I see the spirit!

We demand answers from the government!

We BLAME our politicians for stooping down,

playing the dirty politics – the BLAME game.

What Hypocrites we are!

Ideal Solution

It has been quite some time since my first post and I apologize for the delay in preparing my next post. With so many events occurring and so many “popular opinions” being stated it takes time to grasp the situation and comment sensitively and sensibly on it.

“I believe that the real question before us as representatives of the people of India today is whether we are prepared to take the battle against corruption head on? It is not a matter of how the present impasse will resolve, it is a much greater battle. There are no simple solutions. To eradicate corruption demands a far deeper engagement and sustained commitment from each one of us.”

Almost every Indian today has been made to believe by the Anna Hazzare Movement that the passing of one Jan Lokpal bill is going to cure India of the corruption virus. Yet again we have the news media declare a war between groups and then decide its winner as well. On the fateful Saturday evening when Mr. Anna Hazzare decided to end his fast, “joy erupts amongst the common man of India” as “India wins battle against corruption”. The people have been made to falsely believe that the Jan Lokpal bill will be the single point solution to corruption. Here I would like to present you with a realistic case, almost a classic for all Mumbaikars. Switching lanes suddenly or breaking the traffic light leads to interaction with the traffic police. There is a choice to make here. Either pay the fine and get your license taken and go to the RTO office the next day to collect your license OR pay a bribe. And in this case I will not blame anyone giving a bribe as the system has an established process which is unnecessarily exhausting. So is having a Lokpal going to cure corruption? If I myself prefer giving the bribe to the established process by the system then how is a Lokpal monitoring the bureaucrats and government employees, going to heal the system? The system stays, my thought process stays, my want to give a bribe stays, the want to consume that bribe stays, corruption stays. The system needs to simplified and strengthened with mechanisms to cure corruption rather than curing corruption to strengthen the system.

But how to strengthen the system? There is no single formula really. There are processes which need to be refined and simplified so that the people do not adopt corrupt means. For example, after the success of the project in Thane distirct, the Setu project has been adopted by the Maharashtra government. Through this project, the basic certificates (such as the birth certificate) required by a citizen for any official purpose are issued almost instantaneously at organized camps for this purpose and with no requirement for a bribe. Hence these camps reduce the scope of corruption faced by the common man as he no longer needs to spend thousands of rupees to merely issue a birth certificate. Hence,

“An effective Lokpal law is the only one element in the legal framework to combat corruption. The Lokpal institution alone cannot be a substitute for a comprehensive anti-corruption code. Laws that address the following critical issues are necessary to stand alongside the Lokpal initiative

1.      Government funding of elections and political parties

2.      Transparency in public procurement

3.      Proper regulation of sectors that fuel corruption like land and mining

4.      Grievance redress mechanisms in public service delivery of old age pensions and ration cards.

5.      Continued tax reforms to evade tax evasions.”

The above five points encompasses almost every sector of corruption we see in India today. The crores of “party fund” spent during elections; transparency in public procurement so as to avoid another 2G; regulation of sectors where corruption is rampant to avoid another Yedyurappa scenario; mechanisms to ease, simplify and shorten the process to procure old age pensions, ration cards, to avoid the common man from paying bribes; and lastly tax reforms to evade tax evasion so as to curb private sector corruption. Can one Lokpal take care of these? Certainly not. The Lokpal can supposedly ensure curbing corruption within the government but is it stopping private individuals from evading taxes which is also a form of corruption? Think about the traffic police case. Would I rather pay the bribe or go through the entire process of procuring my license back?

“Why not elevate the Lokpal by making it a constitutional body accountable to the parliament like the election commission of India?”

The three pillars of the constitution for the proper governance in India are the administration, the legislature and the judiciary. Now within the constitution there are provisions to ensure that these three pillars are accountable to one another. The administration is accountable to the legislature and judiciary through various processes such as RTI. The legislature is accountable to the judiciary as a bill can be called for judicial review by the Supreme Court. The judiciary is accountable to the legislature as it is the legislature that appoints and impeaches the judges of the court of law. Who is the Lokpal accountable to? Are we naïve enough to believe that a body having unchecked power over those who are supposed to be in power is not going to get corrupt? I maybe too pro-constitutional so pardon me, but why should any institution made to check corruption and “cure our democracy” be above the constitution that lays the very foundation of this democracy? When no Member of Parliament, no Prime Minister, no IAS officer and no Supreme Court judge is above the constitution then why should the Lokpal be given this special status. If Lokpal is the answer to corruption it at least must be answerable to somebody! Giving it unchecked powers certainly undermines our constitution which has laid the foundation of our democracy.

“India’s biggest achievement is our democratic system. It is the life force of our nation”

The entire Anna Hazzare movement has laid the precedent of undemocratic processes and tested the tolerance of our government. For the first time in the history of an independent India, bypassing all the rules of procedure for conduction the house, the Honorable Speaker, used her discretionary powers to get the house to discuss the Jan Lokpal and more importantly the Anna Hazzare movement. What was the outcome? Victory against corruption or a three point resolution stating the assurance that the parliament will positively think about the three points laid down by Anna Hazzareji, Wait! Both the outcomes do not sound the same to me. There is no guideline as to how this thinking would happen. There is no time stipulation for anything. This is meaningless. Ofcourse, if you do not follow the rules of procedure, if you wish to bypass the standing committee to get a bill to the table, if you wish to bypass the entire democratic process laid down by the constitution then well, the outcome is not going to be very positive as it has been achieved through undemocratic means in a country which takes pride in being the largest functioning democracy in the world.

(The content presented within quotes in italics is from Mr. Rahul Gandhi’s speech in the Lok Sabha on 26^th August 2011. The entire speech is easily available on the web. I am not supporting anybody here, but yes I do support some ideas. )