May 16, 2009

Historic verdict!

Mark this day guys. It is a historic day in the electorate results. As I write this, the government has not been officially sworn in, yet it looks lkely that it will be UPA with SP + RJD. More importantly, without the Left. The Left parties have performed pathetically and has won the least number of seats. In fact, they have lost in West Bengal and Kerala! Wow.. this is almost unbelievable.

Kudos to the Indian voters. Despite low turnout, they have voted for what I believe is the best bet for the national government. Despite strong anti-incumbency factor in Indian politics (same government not being re-elected), UPA has been voted for. And in a manner much better than 2004 elections. The discriminative, regional, negative and extremist politics have been thrown out of the window. The Left, BJP, BSP, etc. have been impacted negatively due to the same reasons. How else do you explain Mayawati faring poorly in UP, her own backyard!

There were concers about a hung parliament, or a coalition government where BSP/Left has a significant say. It is clear that is not going to happen. It is really heartening to know that. I do not have anything against these leaders personally but their ideologies are not forward-looking and inclusive in perspective. Congress was the best in the fore, including having a good second-generation leaders in the form of Rahul Gandhi, Milind Deora, Jyotiraditya Scindia, Sachin Pilot, etc. We want to see a younger parliament to represent our aspirations and ambitions. This elections verdict reflects that the Indian voters have voted for what they believe is right for the future.

I am very pleased with what I am seeing on my TV screens. There is no denying the fact that Congress is way different from BJP. The latter, I believe, has got their priorities wrong. This might well look like wisdom in hindsight, still it is true.

End of the day, as a citizen of this country, I am very satisfied that there will be a stable government at power without the anti-reforms partners like the Left. This, I strongly feel, is good for the country and the economy.


Jatan said...

Hello Sir,
Don't you think India was a better place to live in at times when Vajpayeeji was our PM.. What has Congress done in the past five years? I think that we need a Narendra Modi types to run our country.. take the example of Gujarat.. I think that is the only state which has been taking a step forward each passing day.

harsh said...

I think Indian voter fell victim to the freebies distributed by Congress.

Sample This:

Congress pledged to enact a right-to-food law, which will provide 25 kg of rice or wheat per month at Rs 3 per kg to every family which falls below the poverty line. Like most socialist ideas before this, it is as harebrained as they come, though it sounds very noble, on the face of it.

Anybody who has dealt with the public distribution system in the country will know that most of this rice will be siphoned off even before it reaches the intended beneficiary. As is well known by now, most kerosene sold at subsidized rates is diverted to the black market where it is sold at its "real" price or used by petrol pump owners to adulterate diesel or smuggled into the neigbouring countries.

Or the fact that selling fertilizer at a low price over the years has led to excessive use and falling yields on crops.

One such decision was the Rs 71,000 crore farm loan waiver announced earlier this year. Again a noble idea, on the face of it. But after this, farmers will treat debt from banks as grants from the government, and choose not to return it.

I can go on and on against the foolish economics promised by the various Congress governments (or for that matter various governments) over the years, but that is not the point of this post.

This primarily comes from the fact that parties know that governments have the luxury to spend much more than they earn. This difference between what the government earns and it spends is known as the fiscal deficit. In India the fiscal deficit for the year 2008-09 is estimated to be at Rs 3,26,515 crore crore or 6% of our gross domestic product.

But as Aaron Levenstein once famously said "Statistics are like bikinis.What they reveal is suggestive, but what they conceal is vital." (Navjot Singh Sidhu is a copy cat. Everything he says is not original)

Expressing fiscal deficit numbers as a percentage of GDP is a part of that game. What the number does not reveal is that the Indian government (and most governments around the world) spends much more than what it earns.

As per the budget documents put up on the government of India was estimated to spend Rs 9,00,953 crore in 2008-09 and it was estimated to earn Rs 5,74,438 crore.

This clearly means that it is spending Rs.3,26,515 crore, which is the fiscal deficit, more than what it earns. In percentage terms what it means is that the government of India is spending 56.8% more than what it earns.
This number does not include the oil bonds worth Rs 76,000 crore that were issued during the course of the year, to oil marketing companies for selling petrol and diesel at a much lower price than they buy it at.

It also does not include Rs 20,000 crore fertilizer bonds issued to fertilizer companies for selling at a loss. If we add up all these numbers the correct fiscal deficit comes to around Rs 422,000 crore. In simple English it means that the government of India in the year 2008-09 (which ends on March 31,2009) is estimated to spend 73.6% (Rs 422,000 crore expressed as a percentage Rs 574,438 crore)more than what it earns.

The difference between what the government earns and what it spends is made up through raising loans by issuing debt securities.

If you and me were to take on a loan, we would have to repay it either by earning more or on by cutting down on our expenses. A third way would be to invest the borrowed money in areas where in we can get a return higher than the interest to be paid on the loan taken.But the government does not do any of these three things. Obviously, it cannot always work with a profit motive.

Given this, the government does not earn enough money to pay back the interest on its debt. So what does it do? It takes on more debt to repay its earlier debt and also to pay interest on its existing loans. A perfect Ponzi scheme!

The word Ponzi comes from Charles Ponzi, an American-Italian, who in the year 1919, promised to double investors money in 45 days. What he essentially did was to create an illusion of a successful business by using the money brought in by new investors to pay off the old investors. Essentially the capital of the scheme was used to pay interest as well as repay the money invested.

This is what most governments which spend more than what they earn have been doing over the years. They use new debt raised to pay off the old debt. In fact for the year 2008-09 the interest payment for the government was Rs 192,694 crore. What this clearly shows is that of the Rs 3,26,515 crore debt raised to fulfill the gap between earnings and expenditure, nearly 59% (Rs 192,694 crore expressed as a percentage of Rs 326,515 crore) is being used to service past debt.

The next question, of course is, don't people who buy the debt securities issued by the government know this? Of course they do. But they still continue to lend. This is primarily because of the fact that the government has the right to do something which you and I don't. The government has the right to print money.

So worse comes to worse, the government can always print money and return it. If you and me kept spending nearly 75% more than what we earned, sometime in the future, banks would stop giving us loans, and we wouldn't have the capacity to repay. At the same time we would not get more loans from banks in the future and even be labeled a defaulter.

But governments have the right to print money. And they use it to repay the debt that has accumulated or even to spend money when they aren't earning enough of it. The Fiscal Responsibility and Budget Management Act 2003, does not allow the Indian government to reprint money to repay debt. But when deficits keep increasing, there is always the temptation to just go ahead and print money. And more the deficit increases, the more temptation will be for the Indian government to print money to repay it. I wouldn't be surprised if that starts to happen in the near future.

The US government is doing it freely right now. The balance sheet of the Federal Reserve of US is said to have expanded by $2trillion since October.
Or take the case of Zimbabwe, where the economy has crashed and come to a complete standstill. The government is earning very little revenue and all it has been doing is printing more and more money.
When the government just prints money without earning it, the money supply in the economy goes through the roof. And this increased money supply means too much money chases too few goods, which in turn leads to prices increasing. To beat that, the government has to keep printing notes that have even higher dominations. Take the case of Zimbabwe; the country recently even printed a 100 trillion Zimbabwean dollar note, which was just about good enough to buy a loaf of bread. Economists estimate that the rate of inflation in Zimbabwe is currently at 5,000,000,000,000,000,000,000 (five sextillion) per cent. The simple fact of the matter is that an increase in the quantity of money leads to a decrease in its quality.

Now I am not even trying to slightly suggest that India or the US are headed the Zimbabwe way, but fact of the matter is that high fiscal deficits have never been such a great idea. It ultimately leads to governments printing money big time, increased inflation and in some cases even the collapse of a currency.

Someone, u no ;) said...

me too HAPPY :) to see this kind of result. Somewhere I think it was but natural to happen. Afterall, after Atalji there isn't much power left in BJP nor good leaders as compared to Congress [ I personally feel, m still his ( Atalji's) great fan :)]

U No Hoo said...

Jatan - I agree that Vajpayee was a good and able leader. But he is not active anymore. Based on the current leadership, Congress surely is a better bet. I am against extremism and dividing politics that BJP indulges itself in. Also, from an economic perspective the BJP led NDA does not have the required expertise to tackle things.

Harsh - is that a comment! Phew!! Lot to read for a comment. To be fair, out of context too. Fiscal deficit and stimulus spending is not India/UPA specific. It is a necessary pitfall of the global slowdown/recession. About giving away freebies, again it is not UPA specific. Most parties in India function that way. Also, it is trivial from a macro perspective.

U No Hoo said...

Also, the day someone as extreme and unsecular a leader like Modi gets sworn is as the PM, I would prefer to shift base from India. Nitish Kumar in Bihar has won based on development politics and he has managed to do it without any need for dividing/backard looking politics. Development in Gujarat does not justify the atrocities of any leader/party.

Arunkiyer said...

I am extremely happy with these results...Want india needs is a stable government..Will be interesting to see who gets key portfolios in the Ministry...Personally i would like to see Kamal Nath as Finance Minister

Someone, u no ;) said...

One more thing I would like to say here is, I just hope that this time we don't hear all those jokes and P.J's for our P. M. like the past five years went where all the reality shows and media people were highly focusing into, that Manmohanji is following orders given by Sonia Gandhi, that's really not what is expected from all of us. Who are we to comment on such things though not seriously but still jokes have some limits and afterall we are somewhere making joke of ourselves by commenting on our own decisions isn't that our decision to vote for congress ( now please don't say that I voted for BJP or any other party because whichever party wins it's assumed that it's the country's decision and you are included in it being it's citizen ) and didn't we knew that if Congress wins he'll be our P.M. then why to make joke of some ones job, have anyone of us seen something of such kind happening through our own eyes and what if he follows isn't she the President of Congress why are we supposed to comment, what if someone comment on our work in this manner. I think we Indians know how to take advantage of our rights!!! freedom of speech, right!!! this is what we call "DEMOCRACY".
But we can forget our right to VOTE,

Last but not the least Best Wishes to Mr. U No Hoo for completing two years of bloging today !!!!
Hope you remember that
hope you write more and more and more...

harsh said...

Isn't it fishy that LTTE surrendered or was defeated just after election results and Prabhakaran is probably dead.