Rich like us

Or why a country’s treasury depends on the better-offs to meet its expenditure obligations

By Mohan Sule

How are you feeling?
Ummh…okay. Feeling a bit tired.

Why is it so?
Not getting enough sleep, I guess.

Since when?
Recently. I think I may be having a relapse.

Why do you say so?
Remember when I first told you about loss of sleep? In 2009? It’s the same sinking feeling: Nightmarish vision of being on a planet without air conditioner.

What were the reasons then?
There was bloodbath on the street. The asset bubble had burst. Big US banks were going bankrupt. The credit market had collapsed. My portfolio had halved.

What is it now?
Actually I think the nights are getting shorter. The market has bounced back. The recovery has been long and tiring but rewarding. On the way up I picked up many cheap but sound stocks. My portfolio is looking good again. May be I can make a tidy profit. Retire to the beach shack I keep on telling you about.

So you are happy?
I don’t know. Some solid stocks are coming with a hefty price tag. Tanking up my SUV costs more. And choosing smartphone and tablet upgrades is not as easy as comparing tech stocks. I think he does not like me.

Who is he?
I wish I could tell you. Even I am not sure. He is not always the same. He is a different person at different times.

Like?
He has a weakness for greenbacks. Kids’ gloves for foreigners and boxing gloves for Indians! GAAR!! He thinks he can be another Obama, all the talk about fiscal cliff. I think he is more like Robin Hood. Taking cash with one hand, transferring cash with the other. Good cop, bad cop!

Why do you think he does not like you?
It is not me he does not like. It is people like me he does not like. Don’t get me wrong. But is it my fault that I am who I am? How can harming me make others happy?

Has he hurt you?
Not so far but will soon, very soon. He is waiting for the right time to strike. The countdown has begun.

And when could that be?
I think before this year ends. I can make out. There are enough signs. He is preparing the groundwork. Letting others do the talking, creating the atmosphere so that his action becomes a necessity. He is drumming up alibis to back him.

Is this causing you anxiety?
You could say so. I mean there are ups and downs in the market. Things could go downhill tomorrow. The rupee is a cause of concern. Policy formulation and execution could suffer another attack of paralysis on eruption of yet another scandal. Will China hold up? Yet you have hope. Tomorrow will be better.

Now you don’t feel so?
How can it be? Can I pay you for just 60% of your time? Or may be 50%. How would that feel? Would you be sitting so smugly and provoking me instead of doing your job of calming my fears? May be you are also he! A conspiracy to rob what is mine! For what? To finance your welfare programs?

Isn’t your annual medical checkup due?
I know what it is going to say. BP, hypertension. Apart from saving some pennies in tax, how is it going to help?

You don’t feel the need?
Come to think of it, even small change counts in these inflationary times. You always come up with a solution though it costs a lot for your wise counsel.

I think our time is up. Same time next week?
Talking to you makes me feel better. I think I am more ready than before to face him. He may hate me but cannot do without me!

Cliffhangars

Can India pull back from fiscal and current account deficit, currency volatility, and commodity-fuelled inflation?

By Mohan Sule

The cliffhangar suspense of ‘Will they or will they not’ finally culminated into a predictable end. The US Congress agreed with the president to tax the wealthy, thereby saving the world from falling off a fiscal cliff. The massive tax hikes and spending cuts that otherwise would have been triggered were surefire recipes for another global recession. The worldwide rally in stocks that followed was on the belief that the worst may be over despite the Federal Reserve not bringing forward the timetable to increase interest rates from the near zero and the euro region showing no signs of recovery as austerity measures have stirred widespread discontent. Yet the last of turbulence in the equity market is not past us. The US now has to confront the debt cliff. China is the wild card, with confusing signals coming from its economy as reflected in the fluctuating metal prices. In India, a mini election is on cards as 10 states go to polls this year, raising concern that populist ingredients could blunt the potency of the budget to restore the country’s fiscal health. The third round of liquidity injection by the Fed is contributing to massive foreign portfolio investment. powering the Indian stock market to the rank of the best performer in Asia in 2012, but turning helpless to lift the currency. A bountiful rabi crop is expected to boost the purchasing power of rural India, making the task of taming inflation increasingly difficult even as the Reserve Bank of India comes under renewed pressure from the government to loosen its monetary policy.

Boosting income and moderating expenditure, crucial to reduce the fiscal deficit to 5.3% of GDP from 5.9% last year and consequently weaken inflation, have not made any sizeable progress so far. The two bets of the government to raise funds have gone wrong. The second-generation GSM spectrum auction collected only about one-third of the target. The base price for the second round to dispose of the pricey circles of Mumbai and Delhi, which were supposed to contribute 40% of the revenue but received no bids, has been scaled back by 30% and that for CDMA spectrum by half, proving to be a setback in the effort to raise the intended Rs 40000 crore from this source. Stake-sales in Hindustan Copper and NMDC, the only two PSUs to tap the market in the first nine months, totaled less than a quarter of the overall divestment goal of mopping Rs 30000 crore before March 2013. Not all of the 10 more government entities lined up can possibly enter in the remaining period. There is not much room for optimism that other streams of revenue will be able to make up the gap. If it maintains the current tempo, up about 17% in the seven months till October, indirect tax collection could meet the expected 27% annual increase. The performance of direct taxes, however, is miserable: till December 2012, the growth was slightly more than half of the 15% jump expected for the entire financial year. The biggest chunk of expenditure is subsidy on fuels, which is estimated to touch 2.4% of GDP instead of the budgeted 1.9% due to the 3.5% surge in crude prices in 2012. Prices of petrol were raised nearly 2.5%, LPG about 3%, and disel more than 15% this financial year so far. Another round on cards could fuel inflation rather than cap it.

The share of crude by value in imports is up 35% so far as against 32% last fiscal. Exports by value were down 5% in the first eight months as against the same period last year. Foreign capital inflows had surged 10% till October over a year ago, topping $34 billion. A major contribution was of the flighty foreign funds. At more than 25 time increase, they comprised about 35% of the receivables, while the share of the more steady foreign direct investment halved. The rupee is down to around 53 a US dollar from 51 at the start of the fiscal. The volatility in the currency is hurting exporters and importers and also bloating the overall import bill. The desperation is evident from the finance minister’s announcement to raise fiscal barriers to import gold, which by value is the next big import after oil. Reducing interest rates at this juncture will spur commodity-led inflation, raising the prospect of bubbles, thus trapping the country in a prolonged cycle of high inflation and growth. Currently at the 7% level, inflation is far off the mark from the central bank’s comfort level. India, therefore, will have to tackle the same problem that confronted the US prior to 2008: rising asset prices. The difference being consumption was driven by low interest rates in the US, while it will be accelerating due to rising income level in India. The current strategy seems to be to balance the subsidy-windup-led inflation with softening of interest rates to accelerate consumption- and investment-led growth: a risky gamble that could work, going by the market’s response.