Capital expenditure vs Total expenditure

If the 6.8% Fiscal deficit was not bad news enough, here is something more to be worried about.An analysis of the Plan-Capital Expenditure from the 1995-1996 budget to the 2009-2010 budget shows that the government is spending a smaller percentage of its total spending on creating new "infrastructure" ( Capex in the Plan). The capital expenditure portion of the planned expenditure has dropped from about 10% in the pre 2004 period to about 4.5% now ( Yellow line) . And we are blaming the world economy for India's slowdown ?
And look at the hockey stick in blue ( Total expenditure). Insolvency in the offing ?




Here is the table

Year	Plan - Capital Expenditure	Total Expenditure	Plan Capex as % of Total
1995-1996	18262	183004	9.98%
1996-1997	22530	202298	11.14%
1997-1998	24510	235245	10.42%
1998-1999	26923	281912	9.55%
1999-2000	31264	303738	10.29%
2000-2001	33134	335523	9.88%
2001-2002	37320	364436	10.24%
2002-2003	41420	404013	10.25%
2003-2004	43421	474255	9.16%
2004-2005	47714	505791	9.43%
2005-2006	29638	508705	5.83%
2006-2007	28146	581637	4.84%
2007-2008	31913	709373	4.50%
2008-2009	41301	900953	4.58%
2009-2010	46751	1020838	4.58%

Should we prepare for a 70s rerun ?

The present government has successfully moved India back to the nineties.

• The era of shortages is back ( diesel/power/LPG)
• Rupee is nosediving
• Fiscal deficit is alarming
• Inflation is back in double digits & continues to remain there
• Kashmir is back in the political centre stage

Would the next government takes us back to the seventies ? By that I mean

• Will our taxes sky rocket ?( Marginal Tax rate was as high as 97.5% in 1971 !)
  
• Will ULCA, FERA and other such acts make a comeback ?
  
• Will banks be nationalized once more ?
• Will Gold controls be reimposed ( I know it is a late 60s act rather than a 70s one )
• Will possessing 1000 rupee notes become illegal again ?

Whether we move back to the seventies or bounce back to the noughties would depend on who comes to power. My guess would be

• A Congress/Left would push us back to the seventies,
• A Congress/Riff Raff would slowly move us in the direction of the noughties
• A Congress majority would put us clearly in the noughties
• A BJP/Riff Raff combo would also move us in the noughties direction
• A BJP majority would put us clearly in the noughties
• A Riff Raff with outside support from either the Congress/BJP would leave us in status quo ( i.e stuck firmly in the nineties)
• A Riff Raff/Left combo could even take us back to the seventies in double quick time

Just my opinion. As usual feel free to disagree.

Taming Inflation

India's inflation numbers last week stood at 11.05% and will most likely go up when next week's numbers are out ( Base effect + The effect of the oil price hike flowing through the system ). The government is reaching out into its 1950s & 1970s idea cupboard for solutions to fight the inflation.

The government would do well instead to think of solutions that are more appropriate for India in 2008. The two big difference between 1970 & now is
1) The public sector no longer is the dominant force in the industrial land scape.
2) The middle class has grown in size. It has a rosier outlook to the future & has mortgaged parts of future earnings to improve its current life style.

A 1970s response of price caps & increased interest rates is just going to result in shortages on one hand & an angry middle class on the other hand. A better response would be to cut the exorbitant indirect taxes that the government charges. The steps that the government should take are

1) Slash Cenvat rates for excise to 12% from the current rates of 14%/
2) Slash service tax to 12% from the current 12.5%
3) Remove the cess on excise & service taxes
4) Move petrol & diesel to "declared goods" list , and let the oil companies price it at market driven prices

With these measures the inflation worry will disappear and will be replaced by the "Where will we find the money for all our pet schemes" worry. The excise cut impact will most likely be offset by rising production and the already risen prices ( i.e these measures will stop the further rise of prices, but are unlikely to roll them back, so excise duty would any way be higher than what the government had budgeted).
For the tax losses to the state government on petrol & diesel, the central government could hand over the oil bonds that it has been paying the oil companies.

Will the centre follow this approach ? From the RBI action yesterday ( raising CRR & Repo rates by 0.5%) it looks like the Government continues to live in the past. Will RBI at least be sensible this time by letting the Rupee appreciate against the Dollar( or better still force the rupee appreciation by dumping the enormous quantities of fast depreciating US Dollars that it owns ?) . We will have to wait and see.

Possible explanation for the mother of disconnects

Anantha Nageswaran who writes the wonderful column Bare Talk in Mint had an article titled " The mother of disconnects". He was puzzled at the disconnect between US economic news and US stock markets. I have been puzzled too, but here is a possible explanation, that I can think, for the market behaving the way it is.

1) Most people have bought into the theory that one needs to invest in the stock market with a long term view. So bad news is not getting as many people to flee the markets as it would have a few years ago. So fewer sellers than expected.
2) The liquidity that the Fed is pumping into the system is going into the commodities & stock market, keeping both elevated.
3) In ordinary circumstance, this excess liquidity should have caused the dollar to nosedive. The presence of Central banks ( primarily PBoC) is keeping the dollar from depreciating quickly. Instead it is falling at a pace which China ( and possibly other countries ) are comfortable with and which will allow them to adjust without great social upheaval.
4) What else can one invest in ? Overvalued bonds ? Fast depreciating real estate ? Keep it as cash and watch raging inflation eat it ? Short the market & find that the market is irrational longer than you can be solvent ?

BTW people waiting for the "great crash" may be disappointed. It might be a slow grind down. Waiting with cash ( US dollar) is not going to help either ( Inflation !). Agri commodities seem to be in their own bubble. Investing in gold is fraught with danger ( Not much danger if the Fed continues its current " to heck with inflation" stance) as Fed can quickly change its stance ( Given a pliant media, it will also be sold as the very thing that will end the inflation and therefore is great for America). Oil is possibly the only asset class that may withstand any adverse Fed policy. If any of you know of any other way of preserving capital over the next couple of years,it would be wonderful if you me know about it.

Depression, Recession, Stagflation, Hyperinflation, Life as usual

We are living in an interesting time. Depending on who you read, you can conclude that the US economy is going to experience

1. Depression
2. Recession
   
3. Soft landing. i.e cooling of the current growth. with no major problems. Life would be as usual
4. Stagflation
5. Hyperinflation

The proponents of each of these scenarios have convincing arguments. Surely some one is right and the rest are all wrong.

Here is my take on what will happen.
The Fed seems more comfortable fighting inflation than deflation. So they would rather err on the side of inflation. So scenario 4 or 5 is more likely. Ideally they would like to pull off a scenario 3, but given the extent of the losses in the banking and the shadow banking system, the over stretched consumer debt, the tottering real estate sector and very high trade deficit, Scenario 3 seems more of a hope. The Fed is more likely to let the dollar depreciate further ( By increasing money supply to ward of any deflation and cutting rates to stimulate growth ) . The resulting high inflation will probably need a Volcker like response down the line, but that would be a battle for another day.

Occurrence of Scenario 4 or 5 is going to depend on how much confidence the rest of the world has on the US dollar( A rapid fall of the US dollar can trigger hyperinflation), the extent to which the foreign holders of US dollars/ exporters to the US can break away from the impact of the fall of the US dollar, and how quickly the US economy will get back on its feet & start producing goods & services needed by the rest of the world.

What does this mean for an investor in India ? I do not know. Just make sure you only have that much money in the stock market that you can afford to lose.

Cassandra's predictions for 2008

Cassandra's predictions for 2008. Good stuff.
Link via naked capitalism

Combating competitive tissue papering

The RBI appears to have done a good job in limiting the amount of tissue paper denominated securities that it holds. The worry is that the other currency denominated securities that it holds may soon turn to tissue paper if the US can convince all the central banks to drop rates. What should RBI (or rather India ) do to hedge against this scenario ?

1. RBI can follow the follow the policy of competitive tissue papering ( Thanks Nitin). This would result in high inflation. A politically unacceptable solution for a government that always seems to be on the verge of an election.
2. Slow down the growth of forex reserves. It could choke the inflows or increase the outflows. Choking inflows through blunt weapons like Tobin Tax or curtailing investments comes with its own set of problems. Encouraging outflows seems to be a better option.

What can RBI do to encourage outflows without hurting the Indian industry too much.

1. RBI/GOI could encourage outflows on the capital account by removing the current investment caps for individuals & firms. There will not be any immediate impact for these moves ( I doubt if a large number of people are even investing to the current limit of 100,000 dollars ) but it will create some uncertainty in the minds of FIIs who are making a one way bet on the rupee.
2. Remove wealth tax on gold. Indian gold demand would go up & we would end up exchanging tissue papers for gold, which is not a bad bargain
3. Increase the strategic reserves of oil. India is doing that, may be it is time to accelerate the whole process.
4. Lower customs duties. Domestic industry seems to be doing well. It is probably a good time to usher in more competition

Added on Dec 6th 14:20 PM IST
Disclosure : I have some investments in gold through ETF & some oil company stocks

Where are the dollars ?

The RBI has been furiously buying dollars to stem the rise of the rupee. It has bought over 84 Billion since Jan 2007. Where are these dollars going ?
From the historical data from US treasury India had about 15 Billion US dollars invested in US treasuries. The latest data shows that India is not even on the list. So it has less that 11 billion dollars of US treasuries.
So where are the dollars going ? Is RBI buying other countries treasuries and thus insulating itself from any weakening of the dollar ? If RBI is doing that, hats off to it. It is passing on the role of managing the dollar depreciation to other central banks, while keeping the rupee from appreciating.

Regional Parties Bachao Front

There has been a call from the highest level for a two party system in the country. This has set alarm bells ringing in the head quarters of the regional parties. They have now united under a single banner to safe guard their interest.

The Regional Parties Bachao Front ( RPBF) have been strongly opposed to the unrestricted entry of national parties in elections. Meanwhile several national parties have entered the election frey and are expanding their operations aggressively. These developments in the regional politics are having an adverse impact on a large section of people who are represented by regional parties across the country. In this backdrop the Regional Parties Bachao Front is putting forward a proposal to adopt stringent regulations on the entry on national parties in various states.

• The RPBF proposes that a system of licensing should be introduced for national parties. Any national party contesting more that a specified number of seats needs a license from local licensing board.
• A dedicated committee/board/department should be set up by the local bodies, with representation from regional parties, which should be empowered to grant licenses to national parties.
• Licenses should be given on the basis of a population criterion, i.e. not more than X number of national party candidates per Y population. The criteria may vary between states and cities depending upon the nature of the elections and the votes needs.
• Besides a system of licensing for national parties, a number of steps need to be taken by the Government to prevent the emergence of monopolies of national parties in elections. A single national party should not be allowed to capture a large vote share share. For this it is important to restrict the number of candidates that a single party can field in a city, state as well as region.
• In order to prevent the development of big national party monopolies, it is also important for the Government to ensure its presence in the elections. Several regional parties have become defunct , which need to be revived. Government should fund these parties. Partnerships between existing regional parties can also be considered, in areas where synergies exist.

I can already hear screams from my fellow country men that this restricts the choice that our voters will have. My fellow country men would also argue that the intelligent Indian voter can be trusted to keep the regional parties alive, just to keep the national parties in check etc.

So my question to my fellow country men is, if the above proposal sounds ridiculous from the voters view point why is not this proposal ridiculous?. This restricts the voters ( and non voters) economic choice. Why are we slow to condemn proposals that restrict choice in the economic space, but are quick to condemn restrictions of choice in the political space?

55 Million new jobs and not a whimper

It looks like the OECD report, which concluded that India on an average created over 11 million net new jobs a year between 2000 and 2005, got buried under a ton of debris that passes of as news in India. All major newspapers ( barring the Hindu, which seemed to have ignored this story altogether) ran a story about this in the inside pages. Google blog search throws up very few references to this.
This has triggered my curiosity. 1) Where did OECD get its data from ? 2) Why is the Indian political class ignoring this ?

The answer to the first question is simple.
From Page 30 of the report.

Data reported in the tables and figures are from successive five-yearly rounds of the National Sample Survey – a country-wide survey of households – covering the months of July to June, for the following years: 1987/88, 1993/94, 1999/2000 and 2004/05


So it is from data released some time back. The reports uses the current weekly status as the data to measure unemployment. One could quibble about the specifics, but over all data seems good enough to make estimates


2) The second question is more puzzling. One would have expected our politicians to have been the first to jump in and claim credit for the employment growth. The Congress is understandably hamstrung in claiming this credit. It was in power for very short time during this period and more over it mistakenly believes that it got voted in because the 'aam aadmi' did not see any progress in the early 2000 period. Statistics seems to fly against this belief, but the Congress is unlikely to publicly move away from its belief.

The BJP on the other hand should be jumping in and claiming credit, so why is it not doing so ? Has it also been brainwashed into believing the 'aam aadmi saw no progress' theory peddled by the Congress & the Left ? Can any blogger, who may have an insight into how the BJP thinks, explain this puzzling behaviour by the BJP ?