BackAn anomalous economy
An anomalous economy
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Raju Rastogi’s mother in the iconic film, 3 Idiots, sums up the paradox of priorities succinctly when she tells Rancho, “Ours is a strange country; pizza is guaranteed to come in 30 minutes, but you can’t be sure about an ambulance called for a medical emergency."
After the latest round of petrol price hikes, a business daily pointed out that fuel for cars, scooters and buses was now more expensive than the fuel used by aeroplanes. This, in the intricate and complex web of economic transactions, may actually mean that bus commuters are subsidizing jet setters.
Overtime, ad hoc and quick-fix policy changes, made mostly in response to political compulsions, have resulted in numerous such anomalies. Here are a few more:
Raw materials are at a premium, finished goods are not: After decades of economic planning and strategy revolving round the concept of increasing value addition, it is no longer valued by the market. If profitability is a signalling device for resource allocation and investment in a market economy, then the unambiguous signals emanating from the Indian economy are that raw material production is more valuable than finished goods. Or, to put it simply, the raw material or input is now more highly “valued" than the final “value-added" product. Indeed, the profitability of manufacturing enterprises in the basic and intermediate goods sectors has been reduced to an arbitrage on input prices.
The macroeconomic implication is that the value addition-to-output ratio is next to nothing. And since a large part of the value addition in manufacturing consists of wages and salaries, the income generated in the process of manufacturing is no more than 2-3% of the total cost of producing. Almost 75-80% of the total cost of production is accounted for by raw materials—a drastic change from five years earlier, when raw materials accounted for no more than 20-25% of total costs. So why is the process of manufacturing basic and intermediate goods being carried out at all?
Interest payment is more than capital expenditure: In the Union budget, interest payments are more than the amount that has been earmarked for capital expenditure. To be precise, capital expenditure is only two-thirds of the interest outgo on annual basis.
To cover up this glaring anomaly, the finance ministry introduced a new category carved out of revenue expenditure, called “grants for creation of capital assets", to suggest that not all revenue expenditure is current expenditure. Even after this contestable adjustment is made, capital expenditure is barely higher than interest payments.
Interest payments being higher than capital expenditure is a post-reform, or more appropriately, a fiscal stabilization-induced anomaly. During reforms, under pressure to cut the fiscal deficit, capital expenditure has been stripped to the bone while revenue expenditure could not be reduced. This has resulted in the government spending more to defray past expenses, or at best serving old capacity, than creating new capacities. The impact of this on long-term growth is quite obvious.
Passenger fare cheaper than goods freight: The freight rates in India are the second highest in the world. They are so high because they are made to cross-subsidize passenger fares, which are among the lowest in the world. This populist tariff structure creates an anomaly in the fare-freight ratio of Indian Railways, which at 0.26 is the lowest in the world. This ratio is six times higher for China. The macroeconomic anomaly is that a higher freight level generates a much wider and broader cost push in the system, and eats into the real income of a much wider (and arguably poorer) section of non-commuters. Therefore, it actually induces loss of income and welfare at a macro level.
Per capita debt is more than per capita income. The two are strictly not comparable, for the former is a stock and the latter a flow. But the point is that over time, the flow on the existing stock of debt will be higher than the income stream at a per capita level. This will happen sooner than later, if gross domestic product growth drops to 5-6% and inflation and interest rates stay the way they are.
The average debt of every Indian has been estimated to be around ₹ 35,000— almost equal to one’s annual income of ₹ 38,000 as estimated by the Central Statistical Organization. With debt expected to be in the zone of ₹ 35 trillion, it is set to cross the per capita income level. And this doesn’t even include personal debt. The only saving grace is that the sword of “foreclosure" is not hanging on the head of the government, because nearly 90% of the debt is owned by citizens and domestic institutions.
However, with inflation and interest rates being what they are, if the net present value of future incomes and the debt servicing are calculated, the net worth of an average Indian per capita will probably be negative.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comment at haseeb@livemint.com
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