Indian Economy: News and Discussion (Jan 1 2010)

[somnath]

How did you get there after some banal comments

Theo-ji, Better to arrive at conclusion on banalities than on erroneous theoretical assumptions or wrong data, no? though it would be better to avoid both!

The caste dynamics coming into play is a direct consequence of of the poor thinking behind the NREGA. Not the other way around. How come caste relatively rarely affects noon meal scheme participation

Caste is an enduring feature of rural Indian life..How come you, with your vast knowledge of the rural landscape missed that? There is no "caste impact" on the mid-day meal scheme? As many, if not more anecdotal instances (as NREGA) of caste-impact on mid-day meal scheme have been recorded...

http://www.hindu.com/2010/12/28/stories ... 810300.htm

So much so, that the phenomenon has been studied in some detail by academics..
http://www.sccommissioners.org/pdfs/art ... osertf.pdf

Around here one of the saddest characteristics is the 70+ year olds who are often found on the work sites. What are we trying to do here. Work them to death
----
Finally if we had simply put it into a bank and electronically distributed it at Rs 500 per month we could have covered the most vulnerable bottom 100 million for the past 4 years

Your concern for the elderly and sick is touching...And the solution of a cash transfer is exactly the "end state" solution...The govt is moving the same direction - I expect NREGA to morph itself into a cash transfer scheme eventually...Till then however, in case you have a "targeting solution" in mind that is better than self selection through a work programme, let us know...Even better, drop a note to Pranab-da and Nandan Nilekani, they are trying to solve precisely that...

People may not remember but the oddest thing is that this particular program has been tried many many times before. Its very popular with the professional poverty wallahs. Mostly by state governments but even the GOI tried it under IG in the 70's

Rhetorically true, but practically not...the core difference between NREGA and any other programme (NREP or anything else) is two-fold:
1. Funding - NREGA is far better funded, materially speaking to make a difference...Most fo the other programmes were little beyond tokenism..
2. Oversight - the level of oversight being setup around NREGA is unprecedented for any welfare programme in India...Not just civil society groups, but almost every single IIM and IIT has been roped in to do quality surveys and studies...Institutional mechansisms are being setup through the panchayats to audit expenditure..Above all, it is money that state govts can use imaginatively to increase incumbency - so the smarter state govts are putting up imaginative programmes around it...

And before you go of on your rants about the rich and middle class think about which class you belong to. The rich and the middle class pay for everything. Including the NREGA. It is their savings and investment that allows India to grow at 9% per annum. It is their entrepreneurship that is slowly dragging us out of poverty. It is attitudes such as yours that condemned us to such povertyIt is attitudes such as yours that condemned us to such poverty. Don't you remember all the foolish 'Garibi Hatao', 'Roti Makan Kapada' slogans of of past years. Where did that get us but more poverty. Despite what you may think their money does not belong to GOI to do with as it pleases.

Now this is sloganeering...the reforms were not about arbitrary tax exemptions and subsidies for the middle class and rich...Part of the reforms programme was to eliminate precisely these things...But pork barrell politics, to borrow a yankee term, has ensured that these exemptions have only been perpetuated, not eliminated..This, despite multiple blue-blooded reformers having spent enough blood and sweat on laying down roadmaps for their elimination...

If one were to really "compare" like-for-like, exemptions on direct taxes and subsidies cornered by the middle class/rich (fuel, fertilizer and a large part of food) will be in excess of the total direct tax collections...

dont confuse reforms (incl tax reforms) with tax exemptions and subsidies...Obviously you didnt go through the "tax economics 101" I posted earlier, so you persist with your "not all money belongs to govt" rant...

Let me point out things we could have done with that $40 Billion. Note that the employment generated pays for itself and is hence permanently sustainable.

The budget for NREGA is ~ 9 billion this year....Say this was all diverted to things that you are saying...this year, the total investment in the economy is going to be ~ 600-700 billion dollars for precisely projects of similar type, generating "X" employment ...What do you think the incremental impact of another 9 billion investment (~1.5%) on employment, given the employment elasticities (I posted studies on them earlier) we are seeing over the year in India? compare that to whatever has been created through NREGA - whether its 100 million or 200 million...

Most importantly, when was the last time you heard any minister complain of lack of funds? The numbers are stark - for an investment programme of 700 billion, 9 billion does not make or break anything...

Lastly,

This is essentially why our absolute poverty number refuses to decline.

Poverty has declined much slower than economic growth, which was part of the rationale for NREGA..But how do you know what impact NREGA has had/not had on poverty? What is your data source? If you take the NCAER household income survey which I posted earlier, NREGA (and other things) is having an impact on poverty levels! A more definitive answer would come from the NSSO survey that is currently on...But how do you arrive at this "non banal" conclusion?

[disha]

The problem with our ideas is that they are measurable and tracable. INC doesnt want to do that. They prefer schemes that one cannot trace the money flow and do a cost/benefit analysis.

CONgress does not want mango abdul to do the measuring and tracing. Has there been any measuring and tracing for the following:

1. Apna Utsav. Anybody remember the colossal waste of resources just to keep a few limpets and groupies happy in the name of art!
2. Loan Melas. Tax payers money was used to give freebies to all and sundry (mostly political bootlickers) which saddled the nationalized banks with something called NPAs.

NREGA is just like above. The middle class has to realize that every year some 100 Billion USD will be wasted behind such junkets. That is why, spread the tax net and then let people ask questions on their tax rupees at work.

Imagine setting up small courts in rural areas and streamlining property registration and buying/selling will do. For that it does not require 45 Billion dollars, just 4 Billion will do. But then how will the neta/babu/jholawala/ will get their cut?

[somnath]

NREGA is just like above. The middle class has to realize that every year some 100 Billion USD will be wasted behind such junkets

And I am sure you have the data on how 100 billion is spent every year on "junkets" for the poor?

[Theo_Fidel]

CONgress does not want mango abdul to do the measuring and tracing.

Actually I don't think the Congress brain trust has that much of an IQ.

It is plain laziness. They want to throw some money at the rural voting public to ensure their re-election. This is how regimes that don't really give a damn about their people behave. Witness Gaddhafi's throwing money at people in Tripoli. This is exactly the same. A bribe.

The Congress has long been bereft of ideas and the will to implement programs to drag this destitute class into the modern economy. Just to make a plumbing course available to train say 100,000 a year would require on the order of 3000 highly trained instructors and about 500 highly motivated managers willing to work at government wages. To get this lot retrained over 15-20 years would mean getting about 20 million a year into such programs. So you would need 500,000 instructors +/- ready to go right now. Think of the hard work and dedication to the nation that would be required.

No much easier to tell them to dig/fill holes and throw some money at them. I say again plain laziness and lack of dedication.

[disha]

And I am sure you have the data on how 100 billion is spent every year on "junkets" for the poor?

No sir, I do not have any data, you have the data - I have only common sense. And who said junkets for the poor? It is the junkets for the JNU jhola-wala hanger-on types in the name of the poor. Since you have the data, and you have the statistics, just can you tell us how *you* would have spent say 45 US Billion dollahs, other than NREGS.

Every economy has some bridge to nowhere or city of nobodies. We are no different. Nothing wrong in that, just that the colossal waste could be put to better use. More law colleges perhaps? We did hear the lament from the ex-CJ who pointed out how woefully under-budgeted is our judiciary. That is one my pet-peeve and a Rhona-Dhona.

[disha]

Deleted.

[somnath]

More law colleges perhaps? We did hear the lament from the ex-CJ who pointed out how woefully under-budgeted is our judiciary. That is one my pet-peeve and a Rhona-Dhona

Disha-ji, I am with you on this, we need urgently a much larger judiciary...But guess what? It isnt a question of funding, either central or state (much of the problem is with the lower judiciary)...Its a question of political will..Even if you didnt have NREGA, or anything else, it wont go into a higher allcoation for judiciary, because the political will is missing on this point..

As to what I would do with the allocation for NREGA (it ~9 billion, btw, not 45)...I would convert the entire scheme into a cash transfer programme - to directly give money to the poorest sections, and simultaeneously club it with other sibsidies as well...The good news is that the journey towards that has begun, and in a few years we should see an avatar of the same...

[Arjun]

There is not a single person her arguing against some kind of cash support program, except maybe Arjun.

No I am not against a cash support program.

There are better minds than me out here focusing on the best means of 'targeting' the cash support program but I am not against a dole or social security net for the disadvantaged. But my point, which I had made earlier- is the presence of a NREGA-type social security scheme should actually work as an argument for pushing through other, more difficult reforms in labour, agriculture, SSI reservation... Fundamentally I have more faith in market-driven solutions for long-term growth and employment - and while security nets are indeed necessary now, they should be in conjunction with other measures to unshackle the entrepreneurs.

So I don't evaluate NREGA on a stand-alone basis. If the government fails to follow through with other reforms - NREGA will be proven to be more of a vote-gathering exercise. If there is follow-through - NREGA would come off as a far-sighted move to provide a safety net to avoid the extreme effects of a liberalizing economy.

[chaanakya]

Govt of India and other state Govts have long since trying various schemes in poverty alleviation, both urban and rural.

There are direct approaches to Poverty alleviation.
NREGA falls in that category. Since it targets productive age group some sort of work is extracted before cash transfer takes place. The quality of work and asset is not that important an objective.
Contrast this with Old Age pension Scheme. It is a direct and unconditional cash transfer to person covered under that. Somnath wants NREGA to become like that, a direct cash transfer.

I would convert the entire scheme into a cash transfer programme - to directly give money to the poorest sections,

That could perhaps free up a lot of logistics involved in "arranging for works" "supervision" and "payments of wages". So it would in effect reduce the cost of implementing.

Other such schemes were housing schemes IAY,SGSY,SGRY, FPW and NASP
SJSRY and Slum development fall in this category for urban poverty alleviation.
One can find plethora of programmes, some short lived and some long lived as long as they benefited the Govt of the day and there was demand for them.

There are indirect approach adopted which covers development of rural infrastruture, transfer of technology and promotion of rural businesses and entrpreneurs

REGP, PMRY (PMEGP) TRYSEM, Irrigation schemes, PMGSY,, PMGY, NWDPRA,DDP , IWDP,DPAP etc fall under this category. These programmes aim to provide impetus to rural infrastructure, rural gainful employment, businesses, improvements to area , technology transfer, road building. There are many other programmes run by other departments taking care of different aspects.

On this aspect the criticism of direct approach has been what are posted above. The impact has also been felt on those lines. As long as we recognise those effects and take remedial action , the programme may work.
Such programmes are non asset creating , in the sense economic asset is understood, and that they are inflationary, whether it is termed as "flash" or "structural" , "short term" or "long term". Targeting is another issue. Better utilisation of money in more productive manner is another.

Long term data always point out that these direct approaches have not worked in poverty reduction.They act as social security safety net when consequences of downturn in economy, reduction in gainful employment etc threaten the lowest of the rung.The problem is if it is recognised as social safety system , Govt is committed to continuance is certain conditions are met. As of now NAREGA is not explicitly recognised as such. It may well happen so in future.To that extent I agree with Suraj. Unless there is follow through, it would turn into VG programme and prove white elephant for future generations and albatross for the current generation.

[somnath]

enough has been said on "inflation"..But,

Long term data always point out that these direct approaches have not worked in poverty reduction

Really? There is now an entire body of development economics literature that documents the effectiveness of cash transfer schemes (or in-kind ones) on poverty reduction...I had referened the case of Uganda earlier..

Chile - the economic star of Latam..
http://www.nip-lac.org/uploads/Claudio_Agostini.pdf

some more - Mexico, Zambia, Malawi..
http://www.odi.org.uk/resources/download/1039.pdf

Kaushik Basu's latest book covers the concept in great deatil I am told - havent managed to lay my hands on it yet (its not in Kinokuniya!)...

In the specific case of India, the poverty numbers from 2003 onwards look to be on a downward trajectory - NCAER data posted before...the NSSO numbers will give more substantive details..

So which "long term data" are you referring to?

[Suraj]

When are the new NSSO figures slated for release ? Is there a fixed release date/calendar like they have for GDP data from CSO ?

[chaanakya]

In terms of performance, the trends in poverty
reveal two distinct phases. The first phase, from the beginning of planning to the
mid-70s, was characterized by wide year-to-year variations with no significant
trend; large proportions of the population were below the poverty line. The
number of rural very poor had risen from 182 million in 1956-57 to 261 million in
1973-74, almost accounting for half the additions to rural population during the
period. The failure in poverty reduction could be attributed to the poor
performance of agricultural growth; agricultural production barely kept pace with
population growth during the period, the annual growth of per capita output being
negative. Agricultural production per rural person, agricultural wages and rising
food prices were found to be the major factors underlying the year to year
variations in the percentage of rural poor. In the second phase, from the mid-70s
to the close of the year 2000, the country achieved substantial reduction in the
incidence of poverty (Figure 1); the proportion of the country’s population living
in poverty declined from half to one-quarter. Even in this second phase, the
decline in poverty was not smooth; poverty increased during the early years of the
1990s before it witnessed decline in the later years. Despite the decline in the
incidence of poverty during 1974-94, the absolute number of poor continued to
increase.

Due to methodological changes in the collection of NSS data in the 55th
round
(1999-00), comparison of the pre and post reform period trend in poverty is beset
with problems. The trend in incidence of poverty depends on whether we include
or exclude the 55th
and 56th
rounds. The exclusion of both the rounds shows
substantial slow-down in the rate of decline in the percentage of rural population
living in poverty during 1990-98, but inclusion tends to suggest some
improvement in the rate of decline during 1990-2001.

Whether the improvement in poverty reduction in rural areas after 1998 is due to
favourable growth or methodological changes in the 55th round is a moot point.
However, in the case of urban areas, the picture is very clear; and the conclusion
will remain the same whether the two rounds are included or excluded; the decline
in urban poverty had accelerated in the 1990s.
<snip>


<snip>

The experiences gained so far in India and in developing countries in general is
that despite decades spent in designing and implementing safety nets, the
achievements are not to the desired extent .

The main lesson to be learnt from India’s experience is that the safety nets operated in a top-down
mode by the line departments may perform well in terms of intermediate
outcomes but fail miserably in eliminating deprivation and enabling them to
acquire capability and motivation to participate in development initiatives.

I am sure you would recognise from where I am quoting given your proclivity to rely on secondary and tertiary sources as empirical data and empirical facts. I have refrained from quoting the whole report ( lest you accuse me of selectively quoting) else I would be repeating points made here by members including yourself.

This is the conclusion drawn which has led to formulation of NAREGA. There are several recommendations and few of them led to NREGA. The report also exposes the faultlines in estimation of numbers of poor and methodology adopted for estimation in different phases and definition of poverty itself. Points raised in this report are also echoed by members here and while NREGA has been implemented other schemes have been not given been given same thrust.

[chaanakya]

Another quote from a different report which,I am sure you would recognise .

Over time, while the head count ratio of the poor barely changed over the last
three decades: from 3213 lakhs in 1973 to 3229 lakhs in 1983, 3203 lakhs in 1993/94 to
3017 lakhs in 2004/5 (Table-4). Therefore, income poverty in the country has declined over
three decades by less than one million a year, and it will take at least 300 years at this rate
to eliminate poverty from India.

[Abhijeet]

I think there's a fundamental viewpoint disagreement in the NREGA debate which isn't going to be resolved by Internet discourse (though very interesting).

As I understand the anti-NREGA view, it is:

1. The scheme excludes a lot of the poorest people
2. It is not producing any worthwhile assets
3. It encourages people to be dependent on the government and encourages a "money for no work" attitude
3. It is one of the causes of high inflation

The pro-NREGA view, which I think only Somnath has been articulating, is that:

1. The money involved is small compared to tax breaks for other, better-off sections
2. The government is actively trying to improve targeting -- one by requiring manual labor as a filtering criterion, and by using UID and other techniques in the future
3. The scheme is not meant to produce productive assets, but to provide cash to BPL people -- the work is a fig leaf
4. It causes only local inflation, which the local economy can address -- the amounts involved are too small to have any larger inflationary effects

I think which side you are on depends on how much you trust the intentions and capabilities of the Indian government. If you think that they are doing the best they can, and are genuinely interested in improving the system, then you're probably pro-NREGA. If you think this is just a cynical vote-grabbing technique, and that most of the benefits are actually going to the undeserving, then you're probably on the other side.

Good discussion. I think Somnath has probably read more "primary source" documents than most people on BR , so it's nice to get a contrary perspective to the prevailing view here.

[Arjun]

1. The money involved is small compared to tax breaks for other, better-off sections

I don't think anybody out here wants special tax exemptions for the better-off classes either...A low-tax regime in general is obviously supported by everyone and also justified by the Laffer curve theory as resulting in more revenue for the government - but that is not what Somnath is talking about.

How many folks out here want any special exemptions on top of a simple, easily understandable low-tax regime that is already prevalent as the framework? I doubt anyone does - unless these are exemptions for the disadvantaged among the middle-class (such as senior citizens) or for causes that are worthy of promotion (such as savings or education).

[somnath]

When are the new NSSO figures slated for release ? Is there a fixed release date/calendar like they have for GDP data from CSO ?

NSSO (large sample) surveys are typically done every 5-6 years...The last one was in 2004..Since then the Tendulkar report on poverty estimation was used to redefine the "benchmarks" for poverty, in 2009..the data collection exercise for the latest round AFAIK was completed in Dec 2010 - so the report should be out anytime soon...

This is the conclusion drawn which has led to formulation of NAREGA

In case this conlusion led to NREGA, something wrong with either the conclusion, or NREGA, or the interpretation! Anyways, I think enough has been said for and against the programme...Limited point is that there is enough evidence, and a wide body of development economics literature that points out to material difference being made by cash-transfer type welfare programmes..Hence to conclude otherwise "definitively" isnt quite right...

For India, it was clear in 2004 that BAU, in either welfare programmes or the "trickle down" of reforms, is not working well enough...NREGA was a sort of a disruptive policy intervention...If there has been criticisms of the programme, there have been enough accolades as well, and from neutral, dispassionate sources...One hasnt seen that ever before for any Indian welfare programme....

And Arjun-ji,

A low-tax regime in general is obviously supported by everyone and also justified by the Laffer curve theory as resulting in more revenue for the government - but that is not what Somnath is talking about

That is precisely what I am talking about - exemptions, I have re-emphasized many times, as opposed to lower tax rates...Exemptions are by definition arbitrary, largely unproductive and distortortionary..

[chaanakya]

^^ obviously you recognise the reports and you are so fond of them

[somnath]

Enough of NREGA - its coming off my ears now - sure everybody else's as well! Maybe we can resurrect the discussion when the next NCAER income survey or the NSSO survey results are out..

In the meanwhile, a thought that has often bugged me...Since 1991, the govt of India has been selling off "assets" to the private sector...Now these assets are of two types:

1. Govt equity in PSUs
2. Natural resources - under the earth (minerals etc) or above (bandwidth, licenses)

The money from these sell-offs simply goes into that anonymous pit called the consolidated fund of India..Depending on the govt therefore, the money is either partially wisely spent or completely prfligately...

We know how much got collected out of the 3G auction last year...

In fits and starts, there are significant chunks of govt equity sold off each year as well...the total receipts from disinvestment sale till date is 1 lac crore..
http://www.divest.nic.in/SummarySale.asp

All this is nothing but selling off of public assets that are not being renewed...Unlike tax revenues - if we dont like the tax spending of a govt, we can vote it out - assets sold once is gone forever...Shouldn't they be ringfenced out of a specific FM's discretion?

Isnt it a better idea to create a sovereign fund that warehouses all the money generated from asset sales like these...hey compulsarily invest in G-secs, which means that the govt's effective "fiscal deficit" burden - or market borrowing programme rather - remains the same (as when it is taken in the consolidated fund)...The FM therafter can call upon only the returns, or surplus generated by this fund every year...So the total "withdrawal" from the fund in any year can be a maximum of the returns generated in the previous year...

As a perspective, between just the disinvestment proceeds and 3G/2G/BWA telco licenses, the corpus of the fund should today be standing at 3 lac crores, in case the fund was setup in 1991...A conservative portfolio of Gsecs should yield at least 20k crores out of this every year, in fact more as the fund does not really need to take into account duration risk (as the capital cannot be withdrawn - hence all securities are held to maturity)...

20k crores can fund half of NREGA (back there again ), or nearly double the current JNNURM outlay, or even double the central education outlay.......

there are a few somewhat similar examples around the world..the "best" that I can think of is Singapore's Temasek/GIC, which holds all "business assets" of the government, ie, all govt hloldings in commercial enterprises...Both entities are run professionally, and generate large surpluses that are in turn used to create more business assets for Singapore..

Any thoughts?

[Arjun]

^ good idea. At a high level, it seems to me there is inordinate focus on the P&L side of the government finances (the annual budget, fiscal deficit etc)...the balance sheet (assets side) would also benefit from similar attention. Makes sense to club the holdings in PSU along with the divestment proceeds (similar to GIC), and for the government to report on a regular basis how the total asset portfolio is doing. That would also reinforce the view that divestment proceeds are assets and not meant to be revenue to the government.

[disha]

In the meanwhile, a thought that has often bugged me...Since 1991, the govt of India has been selling off "assets" to the private sector...Now these assets are of two types:

1. Govt equity in PSUs
2. Natural resources - under the earth (minerals etc) or above (bandwidth, licenses)

Fundamental question is, why the government should be in the business of business? That is for point #1. Does it want to create a clone of paki fauji foundation? For the babus, of the babus, by the babus?

There was a time when "mixed" economy was considered a way forward, so that government can seed industries. For eg. government is in making jet fighters since it is high risk and a strategic area. It makes sense there. Does government need to be in non-strategic areas? Here are the list of things which government tried its hands at and made a mess -

1. Andrew Yule and Company
2. Artificial Limbs Manufacturing
3. Ashok Group
4. Balmer Lawrie
5. Biecco Lawrie
6. Birds Jute and Export
7. Central Electronics Limited
8. Dredging Corporation of India Limited
9. Praga Tools

The above are nine of the several dozens. First tell me what is strategic about each of them? What is the risk to the country if all of them go under or hived off? What is the technology or project management or innovation they bring to the table? For the millions spent behind it - how could the government used it better? The croak that after independence there was no single industry is totally ridiculuous (see Andrew Yule and Balmer Lawrie). For example there was "Air India" before it became Air India.

After you give the reason for existence for each and above of them, then we will discuss point #2 of yours. For now, let us stick with the above 9 sample industries and please give me the reason of their existence. If they should not exist, then tell me how the government should divest itself of it. Once we are done with it, tell us which industries government should be involved in, giving good reasons (high risk and strategic and extremely massive investment are some points you can use as a basis). Remember we are still on point #1 of yours - basically why the Indian tax payer should support a government of babus, for babus and of babus with the netas milking it to get votes.

We will come to point #2. But that is for another day.

[Arjun]

Fundamental question is, why the government should be in the business of business?

Disha, as a free-markets proponent I am broadly in synch with the thought that the government should not be in the business of business - but now that due to historical reasons the government does have this portfolio, it is important that the government demarcate all divestment proceeds as assets rather than as annual revenue for its profligate spending.

Secondly, while agreeing that the GOI has made a mess of the public sector (barring some exceptions such as Maruti, SBI, BHEL etc ) - there may still be a case for the government to invest in a new sector IF building such a sector is important for the economy and private sector money does not seem to be coming forward for it. New sectors and industry possibilities keep opening up - the first priority should be to see how the private sector in India can generate competitive firms focusing on the new sector - if for some reason that is taking too much time, there could be a role for the government to invest so as to create the initial infrastructure. Possible areas could be cold storage facilities, semiconductor fabs, defence equipment, space program (ISRO) assets etc.

However the first precondition would be that management of these units needs to be totally revamped and NOT run in the traditional PSU mould. Again the idea of a separate sovereign fund-like structure (like a Temasek or GIC) could have a tremendous impact here. The board of this fund could comprise industry heavyweights like Nandan Nilekani (since he's a govt favorite) and others - with enough stature that they would resist any attempt at interference from the government (the way the RBI functions today).

[somnath]

^^^Disha-ji, I dont have adequate knowledge on the background of the nine companies you have listed...There were lots of reasons for setting up PSUs - protecting worker jobs in a pvt company going belly up was one for example - used extensively for the Calcutta boxwallah companies..

But the question of whether govts should be in business is a bit passe..World over, there are enough companies owned by the govt that are hugely profitable, and/or at the cutting edge of their business..The issue in India was always about control (of politicians and bureaucrats) and lack of autonomy (for the professional manager)...And things have changed massively since 1991 - the better PSUs are almost at par with their pvt sector counterparts in financial performance..There is still a gap, many PSUs are used by the govt as tools for social sector interventions (oil, banks are prime examples)...And biggest, the "directed" standard payscales prevent PSUs from always getting the best talent..

But the question isnt about the merits of public sector ownership, but about using money raised from sale of public assets...Today they are treated as revenue, ideally they should be used to create a sustainable "asset".

Another example of that is Norway, which set up a sovereign wealth fund to adminster all monies generated by the North Sea oil..The fund should be >500 billion easily today, third of fourth largest sovereign wealth fund in the world...The fund is completely ringfenced out of the budget, and the state is allowed to use only 4% (the assumed long term rate of return) of the fund each year for fiscal purposes..

http://www.guardian.co.uk/business/2009 ... ealth-fund

[somnath]

Heck, seems all good ideas have already been thought of by someone before!

Arun Shourie had proposed a sell-off fund during his time as disinvestment minister..
http://www.business-standard.com/india/ ... nd/121187/

[vina]

Yawn. A "sovereign wealth fund" is the surest way to lose the collective shirts.

Many folks here (including many See Near E-Con-O-Mix Mullahs) had argued that India should set up such a fund along the lines of the Mad Mullahs in the middle east or like Singapore etc.

I had told them that they are all going to lose their shirts and sure enough, in the meltdown that happened , they did.

Now, don't come out with arguments like "It will be managed by high IAS officials of impeccable integrity" . If our hidebound rulebound "Prussian" IAS officers can do any such thing as managing a wealth fund, and after doing lamination and getting NOCs and triplication giri, to cover their a*ses, there will be literally next to no investments possible in any reasonable time frame and no wealth generated!

If you hand it over to the private sector /global "Wealth Managment" scoundrels who abound , god save us. It is the old saying that a fool and his money are soon parted.

What works for Norweigians doesn't work for us. Norway is even now one of the highest cost countries in the world and they need to stop money from flooding in. India on the other hand needs all the money it can get, and we welcome a deluge from every source.

The best way to help out is to divest the govt assets partially first in the bulk of the PSUs to get in proper management and other stuff and get the value of the remaining assets up and they fully divest. Take that money to pay down the debt (do that and the govt's debt servicing and deficits fall very quickly indeed) and you free up money for investment and also, shift the focus away to building social investments and infra (schools, hospitals, primary health centers, dispensaries, soup kitchens/ Akshaya patra type industrial kitchens /support) rather than building giant steel plants and other white elephants.

The problem with the companies listed were the old Bengal based Brit companies. The need for GOI to take them over was when W.Bengal became a basket case post 60s and that was supposed to be the "done" thing to save employment. A nice cop out solution beloved to commies. Kick out industry and make the collapsed companies as Central Govt owned, so that you can continue to have employment, 5 star pay and benefits and all the pluses of politicking and militant unionism and zero accountability and responsibility.

[disha]

But the question of whether govts should be in business is a bit passe..World over, there are enough companies owned by the govt

Somnathji Can you please back that up with real data? From world over? From big and small economies alike (you can exclude China).

The issue in India was always about control (of politicians and bureaucrats) and lack of autonomy (for the professional manager)...And things have changed massively since 1991 - the better PSUs are almost at par with their pvt sector counterparts in financial performance..There is still a gap, many PSUs are used by the govt as tools for social sector interventions (oil, banks are prime examples)...And biggest, the "directed" standard payscales prevent PSUs from always getting the best talent..

And that justifies further investment in PSUs?

But the question isnt about the merits of public sector ownership, but about using money raised from sale of public assets...Today they are treated as revenue, ideally they should be used to create a sustainable "asset".

Throw good money after bad, then sell the asset and corall the fund. All of tax payers money going around in circles - sounds like Madoff's ponzi to me.

Another example of that is Norway, which set up a sovereign wealth fund to adminster all monies generated by the North Sea oil..

Now you are talking about Point #2., managing a national asset. Like Spectrum. Though there is no convincing argument made for the Point #1 of yours and now slided into Point #2. Managing national assets (below like Norway or above like 2G Spectrum) is a different aspect. Let us go back to point #1., can you please collect data points for the 9 "nav ratnas" listed - it is publicly available and prove why they should be in existence in the first place. For eg. how long should government hold the assets of Praga tools.

The process of divestment and coralling the fund will come later, though your point was why are we selling the national assets in the first place to private sectors.

http://www.guardian.co.uk/business/2009 ... ealth-fund[/quote]

[disha]

The problem with the companies listed were the old Bengal based Brit companies. The need for GOI to take them over was when W.Bengal became a basket case post 60s and that was supposed to be the "done" thing to save employment. A nice cop out solution beloved to commies. Kick out industry and make the collapsed companies as Central Govt owned, so that you can continue to have employment, 5 star pay and benefits and all the pluses of politicking and militant unionism and zero accountability and responsibility.

Vina, is Praga tools in Bengal?

[somnath]

Many folks here (including many See Near E-Con-O-Mix Mullahs) had argued that India should set up such a fund along the lines of the Mad Mullahs in the middle east or like Singapore etc.

Vina-ji, dont think you understood the concept...Most sovereign wealth funds in the world are setup to manage fiscal and/or foreign exchange surpluses of the sovereign..Typically, these look to maximise returns on the corpus by looking to invest globally...

the fund that I am talking about isnt going to be formed out of India's forex reserves, and India anyway doesnt run a fiscal surplus..The fund is simply a mechanism to ring fence money raised out of one-off asset sales out of the budgetary process...And create an annuity stream of revenues for the exchequer which can be used in mandated sources (something like how the oil cess can be used only for the highways programme, or the education cess)...As these assets (PSU stakes or natural resources) are finite, a ringfenced fund preserves the "asset" in a different form for the future generations, rather than spending it away for the present...

Norway's wealth fund (as well as Singapore's, at least initially was) has a similar objective - since North Sea is an ephemeral source of money, preserve the monies for the future when the oil run out...(Norway's is not a case of "preventing the money from "coming in" - whatever that means, its about preserving the wealth for the future)...

Retiring public debt is an option as well..The issue is that the monies raised by such asset sales is really puny compared to the total amount of public debt outstanding...For a perspective, the total amount raised through such asset sales over 20 years can be estimated to be around ~60-70 billion dollars..Public debt outstanding, depending on the calculations (!), would be in excess of 1.3-1.4 trillion! this year's budgeted borrowings (central govt only) is 3.5 lac crores, or about 80 billio dollars...So the quantum of money available isnt going to make a ripple in the large ocean of public debt in india..

Therefore, using the annuity income stream from the fund (which should do nothing more than placing the corpus in G-secs - makes it "funding neutral" for the govt) for selected projects makes a larger difference...I quoted some instances in the earlier post on usage...

[Arjun]

I had told them that they are all going to lose their shirts and sure enough, in the meltdown that happened , they did.

If you had sold at the lows of the meltdown sure enough you would have lost your shirt. Luckily the Temaseks of the world had better sense than that - not sure if you are aware but Temasek is back at the 2008 peak in asset valuation.

Yawn. A "sovereign wealth fund" is the surest way to lose the collective shirts.

Not at all - all depends on the goals set out for the fund. The GOI has assets today in the form of PSU shareholding as well as divestment proceeds. If you have assets - there is a need for managing the assets - as simple as that !!

Now, if you can live with a 8.5% return on these assets, which can be done through investing in GOI bonds - obviously that doesn't call for an extensive team. On the other hand, if you want to earn say 15% returns - you would invest accordingly. A sovereign wealth fund in itself is hardly anything to be scared of - its really what return expectations are set and therefore what risks are taken. Leave aside the divestment proceeds - how about the portfolio of PSU shareholding assets? A fund that holds all the stakes as intermediary rather than the government directly holding these assets can add value by having an impactful board that brings in more professionalism to the existing PSUs - so that when the divestments happen the returns are maximized. Are you saying that is NOT of value ?

Noone's talking of a sovereign wealth fund that goes out and buys overseas assets - India's private sector is already doing well in that game and we don't need more of that from a sovereign fund.

[somnath]

Disha-ji,

you are taking the discussion to a different direction, but no worries..

Somnathji Can you please back that up with real data? From world over? From big and small economies alike (you can exclude China).

Many Alcatel for example is one of the pioneers in telecom tech - and it is public sector..POSCO used to be public sector..Anyways, these are anecdotal instances..

Prof TT Ram Mohan has done the most extensive work on banking performance - here is a (slightly dated) report on comparing PSU, private and foreign banks in India..

http://digitalcommons.uconn.edu/cgi/vie ... on_wpapers

As you can see, PSU banks post deregulation dont yield too much...If I may, from personal experience, banks like SBI are as savvy in the financial markets as any of their foreign peers..

One more instance - from what used to be a "darling" case of private participation - water..
http://www.psiru.org/reports/2005-10-W-effic.doc

You can find many more on http://www...

And that justifies further investment in PSUs?

Well, I dont think you undertood the construct...The annuity income stream out of the ringfenced "fund" can be used for mandated projects - it can be for NREGA (!), or the highways programme, or for anything else...Doesnt need to be to create new PSUs..

BTW, most of the infrastructure creation still happens in the public sector - so there is no getting away from that!

[somnath]

Leave aside the divestment proceeds - how about the portfolio of PSU shareholding assets? A fund that holds all the stakes as intermediary rather than the government directly holding these assets can add value by having an impactful board that brings in more professionalism to the existing PSUs - so that when the divestments happen the returns are maximized.

At some stage, the fund could morph into a gingantic holding company for all PSUs as well - something like Temasek/GIC...Howver, unless the administrators of the fund does not have the powers to invest/divest, and that decisions stays with the Union Cabinet, then it is little more than an accounting transfer from the President of India to "India Sovereign Holding Company"...

[chaanakya]

Special purpose funds are good idea specially if it goes to infrastructure development or even social sector schemes which are asset creating though not direct cash transfer schemes. Receipts , when they are capital in nature, should be utilised through such funds. Though not necessarily as revenue generation.There may be no need to call it sovereign wealth fund.CRF or oil pool account or PSK are good enough in intent and purposes. unless of course we need revenue stream through investment operations in G-sec or market instruments.

In case of G sec it would be neutral to deployment. Loosing shirt could be possible if it is mostly market oriented fund or funds for managing forex.

[vina]

If you had sold at the lows of the meltdown sure enough you would have lost your shirt. Luckily the Temaseks of the world had better sense than that - not sure if you are aware but Temasek is back at the 2008 peak in asset valuation.

Obviously Temasek doesn't understand time value of money if that is how they comforted themselves and neither do they understand real value of money, esp if you factor in depreciation of the USD from 2007 to 2011, under the torrid pace of Shri Bernanke printing out USD Wampums!

Believe me, they did lose their shirt, along with the rest of the soverign funds who invested in places like Citibank and ML and the others .

The only guy who came smelling out of that was no surprise, Warren Buffet, who got an absolute sweetheart deal from Goldman with a no risk (guaranteed 10%+ coupon) and all the upside ,(a perfect conditional convertible with risk capped and all the upside in place) just so that they could get the Buffet Chaapa/imprimatur on their soundness /solvency.

[vina]

And create an annuity stream of revenues for the exchequer which can be used in mandated sources

Err, you pay down the debt, and then the "annuity" (coupon+principal) you would have paid otherwise on the debt servicing is all yours do with as you wish! Why need to take the risk of investing and then getting returns and creating more Wampum and all that tamasha to do such a simple thing ?

Norway's wealth fund (as well as Singapore's, at least initially was) has a similar objective - since North Sea is an ephemeral source of money, preserve the monies for the future when the oil run out...(Norway's is not a case of "preventing the money from "coming in" - whatever that means, its about preserving the wealth for the future)...

Norway's wealth fund is sort of like "sterlizing" Norway's oil wealth deluge away from the local Norweigian economy. The effect of such unearned wealth will do exactly what the huge transfer of South American gold looted by the conquistadors did to the Spanish economy! It is ephermal ? Maybe, but the effects of that while it lasts can be devastating. That is why a coffee in Norway costs the equivalent of something like $15 in local currency in a local coffee shop, even otherwise.

Retiring public debt is an option as well..The issue is that the monies raised by such asset sales is really puny compared to the total amount of public debt outstanding...For a perspective, the total amount raised through such asset sales over 20 years can be estimated to be around ~60-70 billion dollars..Public debt outstanding, depending on the calculations (!),

Yawn.. Here I was under the impression that the total assets of the public sector is some 40000000000000 crores (or whatever that figure is followed by zeroes), earning a paltry 2% or so ROI..Sell that asset , payback the debt and clean up the Govt's balance sheet! That is quite easy. That sure is more than $60-$70b in total assets with the PSU (outside the oil sector, the PSU collectively have negative returns and if you add oil & gas,it comes to sligth positive from what I remember from long ago!)

Therefore, using the annuity income stream from the fund .

Pay down the debt, you have the present value of all the future annuity payments that you would make available right now!

[ShauryaT]

Pay down the debt, you have the present value of all the future annuity payments that you would make available right now!

This would be the second best thing to do, would not the first be utilizing these funds for infrastructure both rural and urban?

[somnath]

Err, you pay down the debt, and then the "annuity" (coupon+principal) you would have paid otherwise on the debt servicing is all yours do with as you wish! Why need to take the risk of investing and then getting returns and creating more Wampum and all that tamasha to do such a simple thing

Because the amount available through asset sales is so small that its not going to make a noticeable dent in public debt levels in any case...The opportunity profit of that retired debt will then be at the discretion of individual govts and finance ministers in their budgetary allocation...A ringfenced pool on the other hand is distinct, noticeable and ensures a funding stream for key project(s)...As I said before, a bit like the oil cess funding for NHAI...The amount is realtively small (6-7k crores) - but it ensures a g'teed funding stream for NHAI to leverage upon and build its own business plans, away from vicissitudes of budgetary allocations...

Norway's wealth fund is sort of like "sterlizing" Norway's oil wealth deluge away from the local Norweigian economy. The effect of such unearned wealth will do exactly what the huge transfer of South American gold looted by the conquistadors did to the Spanish economy! It is ephermal ? Maybe, but the effects of that while it lasts can be devastating. That is why a coffee in Norway costs the equivalent of something like $15 in local currency in a local coffee shop, even otherwise.

Maybe, not sure how 16th century spanish bandits can be compared to a post modern scandinavian state, but the stated objective of the fund is pretty clear..In fact Norway started the fund pretty much when the oil monies started flowing in...Obviously its not perfectly comparable to us, but it is the sort of thing we can replicate for our own purposes - preserve money generated from one-off asset sales for the future generations, rather than spending it today...

Yawn.. Here I was under the impression that the total assets of the public sector is some 40000000000000 crores (or whatever that figure is followed by zeroes), earning a paltry 2% or so ROI..Sell that asset , payback the debt and clean up the Govt's balance sheet! That is quite easy. That sure is more than $60-$70b in total assets with the PSU (outside the oil sector, the PSU collectively have negative returns and if you add oil & gas,it comes to sligth positive from what I remember from long ago!)

Vina-ji, you yawn too much - wake up and smell the coffee!

Here is a (slightly dated, 2009) CAG report on non-banking PSUs...The profitability ratios are very very respectable across the board...Nowhere near negative territory..Quite the opposite...competition does good things to most people!

http://www.cag.gov.in/html/reports/comm ... chap_1.pdf

This despite the oil companies being saddled with subsidies that the govt doesnt take on the fisc...

For Public sector banks, you can find all the data here..
http://www.rbi.org.in/scripts/AnnualPub ... in%20India

I had posted earlier TT Ram Mohan's analysis of banking performance - PSBs dont yield too much to either pvt sector or foreign banks...

In any case, that is besides the point - the point here is not whether govt should own businesses, that is a separate discussion altogether...The discussion is on using monies generated out of one-off asset sales...

The amount of money that the govt is going to get from one-off asset sales is only going to grow...Besides disinvestment and telco bandwidth, there is going to be significant inflows on account of "profit petroleum" payments in the coming years from the like of Reliance and CAirns...In 5 years times, a fund worth 2-3 lac crores is plausible...Thats around 20-25k every year - I would earmark it all highways and education for a start - would impart a different level of imptus with that kind of g'teed equity every year...

[Theo_Fidel]

The GOI raised about Rs 25,000 crore this year from disinvestment. This was used to pay down the deficit. Without this strategy the fiscal deficit would have been a full 0.5% higher triggering more inflation. This year they want even more.

Also the PSU's contributed about Rs25,000 crore in dividends. The banks contributed another Rs20,000 crore. So a full 1% reduction in deficit spending.

As far as interest payments, as long as our fiscal deficit rate (GOI+states) remains below nominal growth rate ~12-14%, our interest liability will continue to decrease. Not so long ago (Early 90's) our total deficit was often in the 17-20% range, so we have come a long way. The interest liability has continuously decreased from about 35% of budget under the NDA to about 25% at present under the UPA. Total internal debt has decreased from about 65% to 50% over the same period. Have to give the UPA at least some credit for having courage to implement that one. Though there was a slight blip during the stimulus. Both these numbers will continue to decline as long as we keep growing.

It is good for a growing/developing country such as our to have a certain amount of Sovereign debt. Something on the order of 35%-40% of GDP with interest payment of 15% of Budget is good for the economy. It allows banks to reduce their risk profile and lend more aggressively to the private sector. It also allows diversification of portfolios, retirement accounts, etc. Zero government debt will probably have negative consequences.

The one thing I dislike about disinvestment is that it crowds the market and prevents private companies from raising capital. Last year every time disinvestment was done the private IPO's, bond issues, etc simply withered away. This year is going to be a bad one for the private sector in the market.

As far the wealth fund the consensus here is that government should not be in the business of business. How is wealth fund not yet another PSU type business with cronies everywhere. So the answer to PSU disinvestment is to create another PSU. Honestly what can I say, we are like this only...

[somnath]

As far the wealth fund the consensus here is that government should not be in the business of business. How is wealth fund not yet another PSU type business with cronies everywhere. So the answer to PSU disinvestment is to create another PSU. Honestly what can I say, we are like this only...

The discussion again veers around to govt ownership..."Where" is this "here"? Even the traditional Washington Consensus has moved away from a dogmatic position on public ownership..And btw, govt contributes a realtively small % of India's GDP - ~14-15%..

BTW, how does presence of "govt debt" allow banks to lend to private sector more "aggressively"?

[somnath]

Total internal debt has decreased from about 65% to 50% over the same period.

UPA's record on deficits isnt too much different from NDA's..If anything ratios have improved somewhat under UPA as growth has become faster...50% is only central govt debt though - adding in states, the debt-to-GDP is ~70%..Adding in the oil subsidies that are parked with oil companies, the numbers could be more like 75%...Not dangerous given that a very small % is external, ~8-9%..As long as we are funding it internally and generating growth, it isnt really a big problem...

[vina]

Because the amount available through asset sales is so small that its not going to make a noticeable dent in public debt levels in any case

Haaaawww.. The value of the equity of the govt in the paper you pointed to lists it at around Rs.4,84,321.62 crore for the 35 odd listed govt companies. Just getting that down to zero govt equity would free up something like $95b per my Madrass Mat @ Rs 50/USD exchange rate . No chump change. And this is just the tip of the iceberg in terms of assets of govt companies.

...The opportunity profit of that retired debt will then be at the discretion of individual govts and finance ministers in their budgetary allocation...A ringfenced pool on the other hand is distinct, noticeable and ensures a funding stream for key project(s).

.
You increase discretion and temptation only when you create a cookie jar like you mention. Reduce interest rates for all by increasing availabilty of credit by paying down govt debt, everyone benefits, no temptations and no cookie jars!

Maybe, not sure how 16th century spanish bandits can be compared to a post modern scandinavian state,

When the manna drops whether from Conquistadors looting and digging gold from S. America or some BeePee/Shell/ digging up black gold in North Sea, the effect of too much gold, whether yellow or black is the same innit, whether in the 16th century or in 21st century!

Here is a (slightly dated, 2009) CAG report on non-banking PSUs...The profitability ratios are very very respectable across the board...Nowhere near negative territory..Quite the opposite...competition does good things to most people!

How boring. The 80/20 rule (or 75/25 rule or whatever) seems to apply rather well, with bulk of profits coming from govt monopoly sectors (petrol, coal, electricity, steel.. some total five) and the overwhelming bulk of profits while the contribution of all the others is rather pitiful. So any good YumBeeYea trained monkey would automatically cull the pitiful 75% and sell it off and take in the cash and put it to better use. And remember, the figures posted are consolidated net of losses across all companies. Some 70 odd of the 213 in the report made losses, that is a good 1/3.. so the remaining 40% in the bottom seventy five made marginal profits and the top 25% contributing nearly everything!


In any case, that is besides the point - the point here is not whether govt should own businesses, that is a separate discussion altogether...The discussion is on using monies generated out of one-off asset sales...

The amount of money that the govt is going to get from one-off asset sales is only going to grow...Besides disinvestment and telco bandwidth, there is going to be significant inflows on account of "profit petroleum" payments in the coming years from the like of Reliance and CAirns...In 5 years times, a fund worth 2-3 lac crores is plausible...

The first thing you do in Phynance during Valuashun per the Madrassa thumb rule is to see all the "one time items" and if they are like a every year occurance, average them out and consider them as recurring items (one time items eveyr year make them recurring.. smart huh?) and consider them as costs/revenues as the case may be!

So if you say that a regular annuity "profit petroleum" is going to come in from the private sector EP companies (while the fat PSU get to eat and slumber, just like BSNL did from cash flows from private players for the USO fees), it is really annunity flows and not one time!

That apart. If you get 2-3 lacs crores inflows, it makes no sense to not use them and ring fence them away beyond the pale! You are just trading asset class from industrial/PSU dead assets into social assets like schools hospitals etc (and hopefully not waste that into boondoggles like an expanded NREGA)

[Uttam]

Nothing works better than Capital Markets if and only if .......

there are no market frictions.

In presence of market frictions, government (or other kinds) of intervention became necessary. This is what Amartya Sen found in case of government intervention during famines. Similar conclusions were reached by Diamond, Mortensen and Pissarides (all Nobel laureates). There can be search frictions, class mobility frictions, frictions in distribution mechanisms, inertia, etc. that come in the way of capital markets making most efficient allocation.

Now, what kind of intervention works best is of course open to debate.

Anyway, I thought I will lighten up the mood by sharing some good developments:

Keeping Women on the Job in India:Companies are using family-friendly perks to hold on to female workers

Rural women use science to fight poverty in India