Why Kejriwal’s Free Electricity Promise Should Worry You

I’ve mentioned before that despite being a Modi supporter, I am secretly happy that the AAP beat the BJP in the Delhi elections. It’s been less than a month since they have taken over and are already talking about fulfilling their pre-election promises.

When I studied MBA, my favorite subjects were Managerial Economics and Business Strategy. I still don’t understand regression analysis well, but like to look at organizational and governmental decisions from the perspective of economics and strategy. And yes, like you, I’m an advocate of progress and development.

Economics has made me question one promise of Kejriwal in particular - free electricity. And I have quite a few grave reservations about it. Here’s why.

Let’s give AAP the benefit of doubt and assume that they won’t provide free electricity to all of Delhi, but will substantially lower tariffs. AAP has already asked for a coal block from the Central Government (I hope they bid for it instead of demanding it for free). This coal, they say, will be provided to a private firm that will produce 3,750 - 6,000 MW of electricity for Delhi. Is it just me or do you see something black in the lentils, too?

The Delhi Electricity Regulatory Commission (DERC) has already stated that prices need to increase to compensate companies producing electricity in Delhi. Now, on to the AAP’s proposal of reducing tariffs by 50%. To do so, the Delhi government will have to compensate these discoms with up to ₹2000 crore each year. Kejriwal kept saying that the Delhi treasury has ₹5,000 crore in it. Does he plan to dry the funds up within 2 years?

Another question is related to the behavior of us Indians. We’re probably the most irresponsible bunch of people ever. If the prices of electricity drop, Delhiites will leave ACs, lights and fans on all day. After all, why worry since the bill is so low, right? And not just Delhiites, any Indian would do it considering how much we care about anyone but ourselves. This will lead to wastage, and more demand for electricity, further leading to more demand for coal and other resources and invariably, more weight of subsidies on the shoulders of the Delhi government. And if Delhi gets free electricity, these issues will become even more rampant.  So the Delhi treasury may very well run dry in less than 2 years.

Increase in usage of air conditioners will increase air pollution. Kejriwal is already coughing his lungs out. Plus there will be no funds allocated for infrastructure development to reduce congestion. The result? Even more air pollution and poor road infrastructure. More people will cough like Kejriwal and encounter lung disorders. Who will invest in Delhi then? And without investment, where will jobs and better livelihood come from?

The free WiFi, if implemented will also take its toll on electricity production. Contrary to what you believe, WiFi will only be free for 30 minutes in Delhi, after which it will be chargeable. Routers, data warehouses and infrastructure are going to demand electricity, which further adds to the challenges mentioned in paragraph 4. Then again, do you think anyone will pay for WiFi after 30 minutes when they have mobile data and internet at home? I know you will say that free WiFi is on offer in Ahmedabad also, apart from other cities globally. But they don’t have to deal with the challenges that AAP will create. Plus their governments have alternate ways of generating revenue. What plan does the Delhi government have? Populism does not attracts investors.

Which brings us to yet another question. Does a government body need to earn revenue and profit? I say “Yes”. But then I am a ‘capitalist’, right? People like me are considered selfish, greedy and downright evil. Nehru thought so, and hence he was always against the business class - a belief that he drove in his daughter who further stifled our economy when we should have been growing. Apparently, Kejriwal thinks so too. Is the secret love between AAP and the Congress surprising, then? But you know one thing? No focus on generating revenue makes a company inefficient and unaccountable. The result? The demand for bailouts like from Air India. And who pays for AI’s inefficiency? You and me, through taxes. Taxes which should be deployed for growth and development, not to bail out a firm that can’t take care of itself and will continue to squander funds. The same concept applies to governments, whether local, statewide or national.

Populist measures have no place in a developing economy like ours. But they are what please us most. They make us feel secular and pro-poor and all inclusive. However, they offer momentary relief to some strata of people, but we are back to square one in no time. The way forward is pro-development measures. And asking people to be a part of it. The Central government has already started by letting people voluntarily opt out of LPG subsidies and keeping a buffer margin on fuel prices to compensate oil companies. While Modi is headed in the right direction, Kejriwal is headed in the opposite. Only time will tell who’s decision was right, but it mostly will be Modi whose decisions will stand vindicated. We need to think measures and policies from a dispassionate and economic perspective, rather than simply supporting it because we love the party. 

Which Will Be the Fastest Growing Country in the Coming Decade?

“The old forecasting rule was to make as many forecasts as possible and publicize the ones you got right. The new rule is to forecast so far into the future that no one will know if you got it wrong.” - Ruchir Sharma.

Which is the world’s fastest growing economy currently? Without doubt, it’s China. But will China continue on the path of 9-10% growth for the next few years? Most economists think it will, but China is slowing down due to multiple reasons. It may soon witness a recession, which won’t be anywhere close to what the rest of the world encountered in 2008. China’s recession is more like a slowdown to 6% growth.

So which country will bag the gold medal for growth in the coming decade? Ruchir Sharma attempts to answer this question through his masterpiece ‘Breakout Nations’. He has analyzed the history, political scenario and sentiment of a lot of emerging markets and correlated them to the countries’ economic conditions. In this book, renowned economist Ruchir Sharma meticulously dissects countries like India, Russia, Brazil, China, South Africa, South Korea, Mexico, Turkey and others. He offers valid insights, backed up with sound stats, into the strengths, weaknesses and areas of opportunities for these emerging nations.  

'Breakout Nations' - Ruchir Sharma

Every nation has its fair share of obstacles. Whether it’s infrastructure, government overspending, policy paralysis, the refusal of political figures to give up power, stagnation or something else, each country is battling problems which have occurred due to decades of following the same patterns. Some countries like Russia, Brazil, Nigeria and South Korea have used difficult times to revamp the way they functioned, and have been rewarded handsomely. Others have chosen to stick to tried and tested (and purely functional) models which have restricted their opportunities for growth.

Ruchir Sharma isn’t just shooting from the hip like many so-called economists do.  He has toured each country extensively. He brings out astonishing details of day-to-day functioning the emerging nations. For instance, the strategy being adopted by companies in China to woo workers back from their villages after Christmas vacations. Or corporate head honchos in Brazil using helicopters to travel from one office to another within the city because of excessive traffic. Or that Russia is heavily dependent on oil prices to secure its future. Each problem (and more) has stemmed from conditions which have been building over long, and continue develop. Since this book was written in 2011, scenarios have changed a little. But most of his predictions seem on track for the coming decade.

This book is a pleasant and entertaining read for anyone who is remotely interested in economics. The language is simple yet elegant. Facts are made interesting with the help of short stories and anecdotes. It reminds me so much of Gurcharan Das’ ‘India Unbound’, another gem. Of course, after having spent years interacting with the world’s most powerful politicians and writing umpteen research papers, nothing less is expected of Ruchir Sharma. I couldn’t find a single shortcoming in the book. Partly because of my love for macro economics and also because I don’t have even 0.1% of the knowledge which the author has. Read the book to find out which are the ‘Breakout Nations’ according to the author. You will be surprised to know that they’re from among the usual suspects.

Why This Fuss Over the Rupee?

The rupee is tantalizingly close to the 70 mark against the dollar. But why are so many Indians talking about it? Why this ruckus? Does it mean anything to us? Do we need to panic? Our lives won’t change much, will they? We still can go about watching reality shows and spending on expensive gadgets. What do we care if the SENSEX has tanked almost 2000 points in 2 months? Who invests in the stock exchange anyway? Right?

Actually, the weakening rupee will impact all our lives a lot. Let me tell you how.

Most Indian companies borrow from foreign banks because it means a huge savings in interest rates for them. While Benchmark Prime Lending Rate (BPLR) for commercial borrowing offered by Indian banks ranges between 9-11%, interest rates offered by foreign banks may be as low as 3-4%. Telecom companies like Bharti Airtel took loans as large as $52 million through External Commercial Borrowings (ECB). Almost all companies are debt laden; some more than the others. Now that the rupee has weakened, their savings due to lower interest rates have been wiped out. This not only translates to lesser pay hikes for employees but also leads to downsizing. Many blue chip companies in India are already laying people off. Imagine the stress on midsized and smaller firms. So, for one, the weakening rupee jeopardizes increments and jobs.

Now, 70% of India’s imports comprise of crude oil. This crude oil provides our country with petrol, diesel, cooking gas and more. With the rupee weakening, the government will have to shell out more for these crude oil barrels. And they’re not kind enough to bear the brunt themselves. It will be passed on to common man. As a result, we will have to shell out more for these commodities along with vegetables and daily goods. Hence the talk of increasing diesel’s price by Rs. 5 at once. Also, other imports like cars, electronic gadgets (mobile phones, cameras, TVs, etc.) will get expensive. So while our salaries won’t increase, the cost of everything else will. We won’t be able to protect ourselves from the ever increasing inflation.

Rupee v/s Dollar since 2011

Foreign funds and entities will not invest in India. They would rather prefer staying invested in a safe haven like the dollar instead of investing in India and running the risk of losing money.

The economy has spiralled out of control. It is now out of the Congress’ hands. They’ve made ½ the population so dependent upon them that getting out of this gloom doesn’t seem possible for the next year. The Food Security Bill will bleed the country’s coffers of 70,000 crore bucks. As always, it will be ridded with corruption and very few of the deserving poor will get food. Plus, schemes like MGNREGA have made labourers in villages leave farming and sit at home. By registering for this scheme, people are assured of Rs. 100 per day for 100 days. Farmers now find it very hard to get daily wage workers to toil on their farms. Even if they do, the labour is expensive. This means the cost of crops (and invariably, food) increases. Plus, labourers get used to earning without working. This leads to a slowdown in farming, infrastructure projects, fishing, manufacturing and other sectors.

While we can’t guarantee that another party will perform better than the Congress, we should give them a chance. If Modi can drive growth in our country, reduce the leeches in our economy, clear some cobwebs among pending projects, shouldn’t we give the BJP a chance? Even if they don’t do a phenomenal job and the Congress returns to power 5 years later, the latter will at least know that they can’t take their seats for granted. The Congress is complacent now. We need to do something to give them a jolt.

image Courtesy: Google images

Inflation, India & Politics (IIP)

There’s one thing common between inflation and the Indian government. God damn them both!

Very quickly, inflation is the increase in price of an item sold versus its previous price. The inflation could be measured on a month – on – month basis or a year – on – year basis (the price during the same month in the previous year). Inflation has 2 indices viz. WPI (Wholesale Price Index) – price of goods sold in the wholesale market and CPI (Consumer Price Index) – price customers pay for buying goods. The Indian government conveniently uses WPI to measure inflation in order to show numbers far less alarming than the actual ones. CPI (the price we citizens pay) is inclusive of chains of retailers, service taxes, excise duties and more. It’s probably 2 – 2 ½ times the WPI.

Inflation & the Economy (c) colourfultimes.com

While we're busy debating over IPL match fixing allegations, SRK's ban from a cricket ground and stupid actions of Siddharth Mallya, fuel inflation has increased 7%+ as compared to the previous month, while vegetable prices increased a mammoth 61%. IIP (Index of Industrial Production) is gloomy, export figures are being fudged, and the current government is mired in scams. And just a couple of weeks ago, corporate India was begging for rate cuts due to the slowdown in growth. Right! This would give people more money to buy, reduce operational cost of corporate houses and make them profit while we foolishly spend on stuff we don’t need.

The present predicament is also called stagflation, where growth slows but inflation stays high and it’s very 

bad news for a country’s economy.

Yes, fuel inflation is justified because it depends upon the global price of crude. But food prices?

Arresting inflation (c) economicnoise.com

I’ve discussed some reasons for inflation here. The price of primary food items has shot up more than 80% in the last 2 – 3 years. These are essential for survival of a country’s citizens; rich or poor, urban or rural. But precious little has been done to address this. India, in 2011, sat on a 75 – million tonne supply of food, about half of which will get wasted while about 50% of our population will stay malnourished. Sub standard warehousing and storage facilities, infrastructure, transportation & logistics and more contribute to this inflation conundrum we’re facing. Then there’s the huge chain of middlemen and wholesalers. The increase in lifestyle cost has prompted them to hoard food supplies which lead to price rises. And yet, we vehemently oppose FDI in retail – something that could improve these circumstances – easily fooled by the political rhetoric of kiraana stores losing their livelihood. Political parties propose this reform when in power and oppose it when in the opposition. Why? Simply to show how pro – reform they are when in power. Supporting the same when in the opposition will mean potential loss of bragging rights in campaigns running up to the elections.

The government has already stated there will be no major reforms until 2014 (read elections for the Union Government). And what will they offer? Fuel cost cuts, subsidies in food and other incentives which will squander tax payers’ money. All this while, the ‘India Shining’ story is gradually fading away. A 1% drop in GDP leads to loss of 15 lakh jobs in India. And we’ve fallen 2 ½ % in the last 2 years. Should we really vote this government into power again? The Congress needs a jolt! One that makes them realize not to take their seats for granted. Agreed we will lose out for the next few years again due to an even more inept party coming into power, but it things will get better in the long run. Remember how we grew when the Congress came back into power after the BJP lost their incumbency? Politicians are not incapable; they simply don’t want to support growth for fear of loss of voters who depend on their meagre handouts. Maybe they should take lessons from the late YSR Reddy, Naveen Patnaik, Narendra Modi, Nitish Kumar and others.

India's New Generation Impatient?

India’s economy is growing at a record rate! All business channels are talking about India’s ROBUST CONSUMPTION STORY! The young Indian is unafraid, impatient, knows what she wants and gets it! That’s because Indians have started earning good sums of money. And those Indians want to spend on luxury, enjoyment; on what they deserve. We Indians are living up to our expectations! We’re buying expensive gadgets, going on expensive vacations, compromising on nothing less than elite brands for perfumes, clothes, electronics, mobile phones, laptops...

There are 2 concepts in economics – Conspicuous Consumption & Conscientious Consumption. The former is applicable when brand equity overshadows value for money as buyers want to be seen using snob value goods. This was applicable in developed countries until recently. However, it’s now more applicable in India while the latter (conscientious consumption) is applicable today in developed countries. Conscientious Consumption is when value and functionality of goods have more weightage in consumers’ minds than the brand.

People today are encouraged to buy more than they can afford because of loan schemes being offered on everything. So we buy all we want, keep paying off the loans and live on a paycheck-to-paycheck basis. But what’s the ulterior motive in this?

We shell out dollops of our hard earned money to buy things we want. We seemingly take pleasure in using high quality commodities thinking they provide respite from our mundane work lives. The big guns (politicians, big industrialists, etc.) are covertly having the media drive into us the logic that we can buy expensive iPads, cars, Sony BRAVIA TVs, etc. to enjoy the spoils of our earnings. This, we’re made to believe, will make the frustrations at work feel worthwhile. But whose coffers are these filling? The sellers', loan providers' and invariably - through various taxes - the government's. So who thinks they’re richer? We. But who actually grows richer? Those people suck the money out of us.

This logic gets me to another point. In the desire to own more, we start putting up with all sorts of crap. True, we hop jobs… but we’re still working for others. This yearning for money to buy more ensures we do what the higher ups want us to, the way they want us to, when and how they want us to. Some of us try being entrepreneurs, but how many of us seriously risk all we have for something we’re passionate about? The fear of losing it all has been instilled in us. So we toe in line and do not venture off in directions which might make it hard for corporates to retain talent for less. This is the same reason why the education curriculum does not get revamped either. They (politicians, big industrialists, etc.) want us to retain the mindset of learning all we NEED to for a JOB. We focus on placements, salaries, etc. We continue doing work they have chalked out for us to fatten their pockets. We are exposed to redundant educational curriculum to ensure we learn doing things the way they were and are being done. Innovation is barely ever encouraged, unless it makes money for the big bosses.

We’re being conned gradually, and we don’t even know it. The bigwigs don’t want us to think. They act like they’re offering us a lot of freedom, but it’s all well orchestrated. We spend; we make money for banks, industries, the government. Savings in U.S.A. have come down drastically from 8% of the GDP some years ago to less than 0.5% now. The repercussions are that the average American is $22,000 in debt. All this leads to rallies like Occupy Wall Street. The format is now pilfering down to us. Are we prepared to see the truth the way it is? Or are we going to learn the hard way! I guess only time will tell…

Is it Criminal to Think Small in India? (An article by Gurcharan Das)

There are two spaces in the politics of India. And one of them is empty. The two spaces reflect the classic division between those who look ahead and aspire versus those who look back and complain. Our political parties cater to the second--to the victim in us through their politics of grievance. The present gridlock in the parliament is also symptom of the same dispirited politics—no party is sufficiently hungry for reform to break the logjam. No one reflects the spirit of a rapidly growing India. Nor is anyone thinking big--and it’s criminal to think small in India. Until the second space is filled, our politics will not be whole.

Congress appeals to the victim in the ‘aam admi’ with an ever expanding menu of job guarantees, food, gas and kerosene subsidies, and more. The BJP panders to the sufferer of historical Muslim misrule and to Congress’ minority vote-bank politics. Mayavati and caste parties focus on the historical injustice to Dalits and OBCs. The Shiv Sena gratifies the injured pride of the ‘Marathi manoos’. All of this is about the politics of grievance and injustice.

India, however, is changing dramatically. It is nothing short of a miracle that it has become the world’s second fastest growing economy in the midst of the most appalling governance. With high growth, mobility, and a demographic revolution of the young, Indians who aspire will soon overtake those who see themselves as victims. Pew surveys show that a majority of Indians believe that they are better off than their parents and that their children will do even better. The person who got the 750 millionth phone number last month was a village migrant whose dream keeps slipping as his calls keep dropping partly because A. Raja corruptly handed out the 2G spectrum. India’s 100 millionth internet user in 2013 will have information which only the most privileged could access twenty years ago. No one in India’s political life captures their hopes.

China’s politicians do a far better job. While we debate if growth is pro-poor, China talks about growing rich. It understands that performance is a function of expectations. Those with higher expectations get higher performance. China no longer thinks itself a Third World country—it is challenging America today. In India, only a few politicians-- Nitish Kumar, Sheila Dixit, and Narendra Modi--appeal to the aspirers. They speak the language of governance, roads and schools. But we need many more of them.

When I put this to a powerful Congress politician, he said that ‘India shining’ had died in the 2004 election. I gently reminded him that India’s high growth economy had delivered 300 million into the middle class; another 250 million had been lifted out of poverty since the 1980s. So, a total of 550 million aspirers are surely worth fighting over. ‘Ah, but there are still another 550 million whiners, and their votes are more reliable than the shiners!’ he said. If poverty were to magically disappear in India, the Congress party might lose its reason to exist.

Aspirational politics would tackle our problems differently. Take, for instance, food inflation. The politics of grievance applies short term bandages--it tries to catch hoarders, stops forward trading, forbids export of grains when the country has had a bumper rice harvest and expects a record wheat crop (while ignoring Rs 17,000 crores of grains rotting under the tarpaulins of FCI). The politics of aspiration would recapitalize and reform agriculture and raise long term supply—it would allow competition against FCI in the warehousing of food, permit foreign investment in retail to establish cold chains, and allow farmers to lease their lands in order to raise productivity.

Who will fill the empty space in Indian politics? None of our parties understands that we live in a time of revolutionary change. Could it be Rahul Gandhi? But so far he hasn’t given any hint that he thinks big. India has doubled its cotton crop in the past five years; yet there have also been suicides of farmers in the cotton growing areas. Both facts are correct. Rahul Gandhi has chosen to focus on suicides. The future, however, will be built by those who focus on the first, who think big and give young Indians a sense of limitless possibilities.

Courtesy - http://gurcharandas.blogspot.com/