Happy New Year :)

Fiscal Cliff: The New Guy in Economic Town

Fiscal Cliff is the latest buzz word in US and if it is bothering US the whole world has to be obsessed with it and so it it. The US economists are debating how should the govt deal with it and the Republicans are trying to use it to cut a bargain with Mr. Obama. What is this fiscal cliff that has stolen the attention away from EU and its economic mess. It refers to the expiry of massive tax cut introduced during Bush administration as well of a no. of concessions and stimulus measures introduced during Obama regime in January 2013. Plus the deficit reduction plan as part of the debt ceiling deal struck in August 2011 are scheduled to start from January 2013. So US with its fiscal cliff is eyeing too massive- too soon deficit reduction of a around $600 billion.

What is interesting is that as per a survey a large chunk of US population believes that fiscal cliff will result in deficit increase and they can't be blamed for this misinterpretation. They are under this impression as the same deficit hawks who were crying over USA's 1.1 trillion $ deficit are now crying most loudly over fiscal cliff. Is it because suddenly they have realized that deficit reduction can be disastrous for a depressed economy or because the largest chunk of deficit reduction in this fiscal cliff  comes from expiration of tax cut for the ultra rich. Since they are demanding a deal on fiscal cliff in which they want to extend the tax cut the reason has to be the latter one. Now the question is why do they believe they can have a deal and president Obama will give in to their demands. It is because along side the tax cut on rich a no. of stimulus measures of Obama regime are also expiring as well as the deficit reduction plan that will cut social security spending are also scheduled to set in. This will heard the middle and low class who are already hurting due to depressed economy. So, Republicans are sure president Obama will make a deal with them to postpone the execution of debt ceiling deal.

Both the sides are proposing deals. While Republicans want a rise in medicare age as well as reduction in social security spending along side the extension of Bush era tax cut to clinch a deal. On the other hand President Obama is keen on continuing the social security spending, implementing health care scheme and extending Bush era tax cut to upper middle class but, insists that wealthiest of Americans should pay proportionately. With negotiations going on vigorously a deal is expected in few days i.e. before the cliff sets in.

The big worry over fiscal cliff is because with US economy already recovering meekly any cut in spending will make the situation worse. Multipliers work both way and now even IMF acknowledged in its latest world economic outlook that multiplier effect is larger than it earlier anticipated in the depressed economies i.e. every spending cut depresses the economy further by more than the amount of cut. This is not what the world expects at this point when  Europe is already struggling and the drivers of growth i.e. developing countries are hanging to growth by a straw. So, US policy makers need to get over with negotiations over fiscal cliff and cut a deal that saves the economy from going into downward spiral. Its not that US does not need to move towards lesser debt and deficit it is just that this is not the best time for deficit reduction. During depression govt doesn't crowd out private investment rather it encourages it. So, austerity should be saved for boom and let prosperity return to world economy.

Being Poetic

The ruins of Nalanda University tell a story of glory & culture and this glorious chapter of our history deserves a revival. My visit of 2006 to these ruins inspired a poem. Here it is :)

नालंदा विश्वविद्यालय का खंडहर 

The Show is Over, Let Us Move to Business Now

For Past one year or so India's politico-economic debate has been centered around FDI in retail as if it is the real "Game Changer" for Indian economy. Precious and Costly days of parliamentary sessions have been wasted on this executive decision which definitely deserved an honest debate but not a long drama. Finally the show is over. Lok Sabha today voted for FDI in retail under there special rule and thanks to the politically logical (difficult to be justified if you are not a politician ) walkout by few parties govt. survived the vote and was saved from humiliation. There is nothing more the opposition can do on this matter and now it should allow the public to take over. When the nation goes to poll in 2014 it will decide whether or not to support a wave of FDIs that have been introduced. 2014 is not far away. I doubt if much FDI in multi brand retail will come by that time. If the public gives its verdict for the opposition it can reverse the decision or at least make stronger regulations to save their beloved 'Junta'. I'm saying so because the Pepsi and McDonald that Ms. Sushma Swaraj (leader of opposition in LS) condemned were there expanding during NDA regime too. However, I don't remember any specific procurement regulation being enacted. Moreover, there were factual errors in the speech against FDI in retail.

Source: Economic Times article, 'FDI debate leaves a bitter taste for McDonald's, Pepsi and KFC' 5th December 2012

So, both opposition and govt. used facts to their convenience. Anyways my point is FDI in multi brand retail has garnered enough lime light. It is time to let go and grab a new issue.

Now that opposition's demand of voting has been accepted and voting over we should hope that they will allow the house to conduct its normal business and do what it is responsible for i.e. legislating. A no. of legislative decisions are pending that have clouded the policy scenario in the country. As a result investors aren't sure of what to expect as future policy and this has brought investment to standstill. Industrial output is falling and agriculture keeps hovering around 2% growth rate. This is where we need the debates to be centered around and action being taken. Land acquisition bill if passed will give much clarity to new investors and relief to industrialists with pending acquisitions. Similarly a clear cut policy on allocation of natural resources will help industry shed the costly coal import when domestic coal is lying untapped. Electricity consumption in country is lowest in the world not because there are not consumers but, because enough is not being produced, in this scenario power sector reforms will definitely do miracles for ailing economy. We all know govt. gives huge subsidy on fertilizers but, few understand that Indian agriculture is suffering due to Urea subsidy, a reform here will be welcome. Govt. is driving MSP constantly upwards and procuring in huge amounts. Still, only food prices are going up and the money is not showing in farmer's bank account. FCI's procurement is well above its storage capacity and grain is being wasted when millions are starving. A reform in APMC Act and provisions to link free markets nearer to farmers will be welcome move.

Above were just glimpses of where we stand and why is Indian economy slowing down despite all growth drivers being intact. Overall we need a no. of ground level reforms that can change the basic structure of Indian economy and synchronize its employment and income pattern. Most of what has been happening in names of reform has been attention seeking small tweaks and since opposition thinks it lost on attention seeking it makes those tweaks big issue when bigger issues are pending, I hope some of the important acts are passed in the winter session and the economy ends FY 2012-13 on a hopeful note.

Some Thoughts on the FM's 'Game Changer'

I'm definitely late for commenting on the ambitious Direct Cash Transfer scheme that the UPA is eyeing to implement from January 2013 and that was called a 'Game Changer' by Mr. P. Chidambram, our Finance Minister a few days ago . A lot has already been said in following days. Even the election commission has taken a note of it and asked the govt. why it announced such a populist plan when model code of conduct for Gujarat elections is in place. So, it is certified that the scheme is populist as endorsed by EC, opposition and definitely Congress. It has the capacity to be popular means it will influence life of millions that too in a positive way. Congress is hoping to achieve from this scheme what it achieved form MNREGA in last general election; a reign on anti incumbency and return of power. Honestly speaking, it has the power to do so given that the govt. is able to achieve exceptional administrative efficiency to implement it in enough no. of districts by the time of general elections in 2014 so that it has a shining report card to show. There is nothing wrong with the govt. going the populist way as every ruling party uses the welfare state as a tool to present itself as a welfare oriented party. So, the scheme is a definite game changer as far as electoral landscape for 2014 elections is concerned. Now, the question that remains is if it is a 'Game Changer' for the welfare landscape in India.

Direct Cash Transfer aims at depositing direct cash in beneficiary's Aadhar linked bank account for welfare programs. Initially it will be implemented as a pilot project in 51 districts from January 2013 and around 29 welfare programs will be part of it. DCT aims at eliminating duplication of efforts, fake beneficiaries, commissions that the middle men in the distribution process eat up and a lot of administrative complexities. While elimination of administrative complexities and fake beneficiaries will save money for the govt., elimination of middle men in welfare amounts distribution will reduce corruption and increase the amount that reaches the beneficiaries. 

However, a lot needs to be done before DCT can be implemented for all welfare schemes. Even the govt. has accepted that linking food subsidy to DCT will be complex. The biggest problem is identification of beneficiary. In India it is a proven fact that many poor are not part of BPL list and many not so poor influentials are part of the list. If all schemes are delivered in form of DCT the left outs will be completely out of the welfare net. Presently a no. of schemes like education, health care, subsidized electricity, water etc. being universal, they at least have some access to the welfare net. 

Then the question arises, it is OK to give direct cash to poor but are we ready to eliminate subsidies completely from education, electricity, water which are merit goods and presently being provided by public sector at rates much lower than cost price. Instead of gradual increase in rates and their alignment to market if subsidies are eliminated at once it will create a definite social unrest. So, these goods also fall out of DCT scheme at present. 

Misdirection of the cash by one family member in activities like gambling and liquor is also an issue that needs to be thought. That is why not all welfare services can be replaced by Cash. Instead of having public schools giving money to parents to send children in private schools is not a solution. Public schools are needed, universities are needed and we need to keep them running.

Thus, while DCT is good for all those schemes in which already cash is being paid out as instead of going through a distribution channel of govt. agents it will directly go to beneficiary's account. It can definitely not be one solution fits all and state has to keep on delivering public goods in other forms too. DCT is one way however additional measures need to be chalked out to ensure public goods are delivered efficiently at low cost. Before making DCT the flagship of its welfare schemes and starting to eliminate other welfare schemes govt. must make sure it has a plan in place for targeting beneficiaries and a phase wise approach of linking prices of subsidized goods to the market determined rate.