Friday, September 21, 2012

Money doesn’t grow on trees! PM teaches people and the opposition some economics….

Only someone so knowledgeable in economics can talk to the nation in this manner. Only someone so intellectually honest can tell it so straight. Only someone so well regarded can teach – almost berate – the nation with his Money doesn’t grow on trees statement. The PM showed in his televised speech last night that not only is he a good economist, he’s also a great Professor who’s willing to teach his students (and the opposition) a good lesson!

The PM was so right. Each one of us knows it in our own personal lives. Money indeed doesn’t grow on trees. How many of us resort to deficit financing in our personal lives – spending more than we earn and then borrowing to cover the gap? None. And yet we expect the government to do precisely that. Now I know that there is a very rational reason for deficit budgets in economics, but there is a limit to which those deficits can be allowed. Stretching the elastic band of the deficit beyond that limit would make it snap. Most people understand that instinctively. But most people don’t know how the country has reached the precipice of fiscal imprudence. Most people don’t know how deficits cause inflation. The diesel price hike may cause a short term spike in inflation, but the deficit reduction will alleviate inflationary pressures in the medium term. The cacophony of politicians typically (and intentionally) tends to obfuscate the facts; hide the realities. Most people now know that diesel has gone up by Rs 5, but hardly anyone would know that the government will still spend Rs. 1.6 lac crores out of its pockets as subsidy.

The truth is intentionally obfuscated like I said. Sitaram Yechury appeared to be asking an innocent sounding question last night, except that it was anything but innocent. If there are so many losses on fuel, he asked, then how come the Oil Marketing Companies (IOC, BPCL etc) are making so much profits? The veteral politician – an MA in Economics – does not realize that the OMCs “make profits” because they get the subsidy from the government? That’s the Rs 2 lac crores that the government gives to the OMCs, so that the OMCs can report clean results. The government takes the hit in its own budget. Does Sitaram Yechury not realize this simple fact? Of course he does, but he is in the business of obfuscating the truth.

Or take the BJP which made so much noise about the diesel hike. The BJP always speaks with a forked tongue. So it also seeks to take credit for the fact that it had decontrolled diesel. Now how many people understand what decontrol means? Very few. And that is precisely what the BJP counts on in obfuscating the truth. In reality, if the decontrol had been continued by the Congress in 2004, the price of diesel today would have been another Rs 12 higher. But the BJP won’t say this. Incidentally, I think the BJP was right in decontrolling diesel. The 12 rupees higher pricing would have been spread over a much longer period of time and there would have been several ups and downs during those years. People would have got used to it by now. So the BJP was right; what it should rightfully be saying is that this method of increasing diesel prices (in jerks) is wrong; it should not be opposing the price increase itself. See the subtle difference? So easy to obfuscate!

No one of course brings out the other truth that the central government is out of pocket to the extent of Rs 50 thousand crores on account of fuels subsidy (it gave Rs 1.4 lac crores to OMCs last year. Got Rs 90 thousand crores as taxes. Net loss Rs 50 thousand crores), while at the same time, the states earn Rs 1.25 lac crores on account of the taxes they levy without having any matching liabilities. This is their “profit” as it were. This time around, the taxes pocketed a cool Rs 8000 crores more because of the Rs 5 hike. How convenient is this? Everytime fuel prices rise, the BJP gets a stick to wield the Congress with; and at the same time, the coffers of its state governments become even fuller. How nice! But such lies have to stop sometime right? A national party tasked with providing a responsible opposition cannot cheat in this grotesque way, right?

The truths about FDI in retail are similarly obfuscated. In this regard, Dr. Amit Mitra – a man I regarded a lot in his earlier avatar as a capitalist – sounded almost like a joker when he was questioned by Arnab Goswami about why he had changed his tune after becoming a politician. Amit Mitra’s answer was funny and silly. “Even you changed your tune from the time you were in NDTV”! What kind of an answer is that? Then he rattled off some poverty numbers in his constituency. So is Dr. Mitra saying that when he was FICCI Secretary General, he did not know that India was a poor country? Amit Mitra’s only lame duck excuse was that he has now become a politician. So he must change his tune?

So much misinformation is being spread about FDI in multi-brand retail too. People may not realize the kind of strides our domestic large format stores have made in the last ten years. The Aditya Birla group has 540 stores under the “More” brand and it plans to more than double that number by 2016. There are more than 200 Big Bazaars, more than 200 Spencers and more than a thousand other brands in the domestic organized market. In spite of such rapid growth, has anyone seen any kirana store shut down? Not even in the vicinity of these large formats. How many Walmarts and Carrefours and Tescos will come up? I can bet….not even 50 in the first ten years. What are we talking about here? The BJP intentionally spreads this misinformation to protect its money-extorting and anti-people trader community.

The BJP’s Yashwant Sinha again lies in today’s Economic Times. In “Why the Media and Pundits are wrong on reforms”, he complains that “our own impressive record of economic reforms during 1998-2004 did not help us electorally”. The stats reveal otherwise. The BJP delivered just 5.8% average GDP growth in these six years, down from the 6.7% in the Congress/UF period prior to 1998. The BJP had no impressive record of reforms – in fact, it had a very poor record. That’s why it lost in 2004. Yet, its easy for Yashwant Sinha to obfuscate the truth.

Only the PM with his enormous credibility could have done what he did yesterday. He explained the truth; he sought support from the people; he punched at the opposition; and he promised to do whatever it would take to get the country going. The mood in the country is with the PM. People understand that a Rs 5 increase in diesel is no big deal. They want a government that reassures them that it knows what it is doing. The opposition better realize this mood in the country. This mood is returning after 2 years of gloom. This mood will devour those who try to put a lid on it. Indians are happy people; and they are cheering the PM today.

The real truth is that the PM was honest and knowledgeable in his TV address. Honesty is the PM’s hallmark. Knowledge his forte. He’s been hemmed in by Mamata now and the Left in UPA-1. Give the PM 5 years of unfettered rule; and see how India changes. I remember in the 1980s (yes, before Modi!), how a single IAS officer and Ahmedabad’s municipal commissioner Keshav Verma changed the face of the city by his strong administration. Another municipal commissioner, SR Rao of Surat, made the city the 2nd cleanest city in India after the plague. All this in 5-10 years. But they had the backing of their political bosses. Let’s give the PM the backing and see what he does….


  1. Mostly unresearched and unsubstantiated gossip is passed on as discussion on prime time TV. It is both disgusting and disconcerting.
    A point to draw your attention is last night’s discussion on petrol pricing, where some member (Goel) referred to petrol basic cost to be Rs 30/- and hence at 70/- odd, petroleum companies are making obscene profits!
    At an average $100 a barrel (160 liters), the average price of crude works out to Rs34/- a liter at Rs 55/- to a USD. Petroleum refining is a capital intensive and high energy consuming operation. Petrol content is around 35% at best and can be improved by cracking which in turn required further energy. Manufacturing cost alone would be in the range of around 8/- per liter. Nearly 35% of products that include diesel, kerosene and bitumen fetch prices far lower than even the manufacturing cost.
    Coming to petrol, a back of the envelope calculation shows that, on a manufacturing cost of around 42/-, you need to add transportation cost and dealer’s margin (around 4/-). Then the cost of 46/-. Add to this, central excise (which is levied on all manufactured cost) of 5/- and around 25% average state levy, you have pump price of 65/-. This is the price averaged over all products. A higher fraction such as petrol certainly has more cost attached (for eg, bitumen cannot be sold at that price!)
    Same companies that make losses do earn substantial profits on export of refined products, indicating market pricing in other countries. Reliance is an example, who do not sell diesel in India, but exports as it is not compelled to do so like State owned oil companies.
    I am amazed that reputed media companies allow such trash to be transmitted on their TV shows without such lies being nailed, live on TV.


  2. There is a strong need in the country to prosecute those who make false and baseless public statements befooling the gullible public. Dissecting the misleading statements of opposition parties, as you have been doing in this blog, should come from the Govt/Congress in their advertisements/ statements rather than inserting huge ads which everybody takes as manipulated self-propaganda.