Some Freaknomics? - For a Change!!

As per our Constitution, Article 47 states that "Government shall endeavour to bring about the prohibition of the consumption (of alcohol) except for medicinal purposes of intoxicating drinks." In reality this completely fails.

Many of us know that, Alcohol consumption is steadily increasing in developing countries like India and decreasing in developed countries from 1980’s.  It was estimated that that are 62.5 Million alcohol users in India. A study shows that per capita consumption of alcohol increased by 105.7% between 1970 and 1996 (over the 15-year period) (Source: Alcohol related harm in India – a fact sheet by INDIAN ALCOHOL POLICY ALLIANCE)

India is generally regarded as a traditional ‘dry’ or ‘abstaining’ culture (Bennet et al, 1993). Yet, it has one of the largest alcohol beverage industries in the world. The UB Group, for example is the third largest spirits producer in the world after Diageo and Pernod Ricard (ICAP, 2006c). India is the dominant producer of alcohol in the South-East Asia region (65 percent) and contributes to about 7% of the total alcohol beverage imports into the region. More than two thirds of the total beverage alcohol consumption within the region is in India.

There has been a steady increase in the production of alcohol in the country, with the production doubling from 887.2 million litres in 1992-93 to 1,654 million litres in 1999-2000 and was expected to almost treble to 2300 million litres (estimated) by 2006-07 (The Planning Commission  of India, 2003).

Though consumption is still low, patterns of alcohol consumption vary widely through the country. Punjab, Andhra Pradesh, Goa and the north-eastern states have a much higher proportion of male alcohol consumers than the rest of the country. Women tend to drink more in the states of Arunachal Pradesh, Assam and Sikkim in north-east; Madhya Pradesh, Chhattisgarh, Orissa and Andhra Pradesh in central and east India; and Goa in the west, compared to other states. 
(Source:F-Current Patterns and Trends – ALCOHOL ATLAS OF INDIA –WHO)

This is the trend shown in the recent study on Alcohol in India. Now, when it comes to revenue part there is large part of revenue come from Liquor. In 2006-07 the combined earnings of States from alcohol were estimated about Rs. 30,000 crore which was over 11.5% of tax revenues. In fact, liquour was the second largest contributor to the State’s aggregate revenue kitty after sales tax  which was Rs 1,20,709.15 crore.

The revenue generation from alcohol is a national phenomenon. Karnataka is leader with the excise collection of Rs. 4060 Crore while Uttar Pradesh is in second followed by Andhra Pradesh in third with Rs. 3650 Crore and Rs. 3250 Crore respectively. 

(Source: Can govt ignore alcohol's revenue earnings? - IBN)

My Reflection:

India is the one of the largest producer of Alcohol. This news may not be surprising to many of us; but, the thing is our constitution says one thing and the reality is totally different. The worried part is consumption of alcohol by youngsters has increased from 2 percent in 1990 to 14 percent in 2006 (below the age of 21) and among adults (between age group of 21-30) it is increased from 29 percent to 35 percent in the same timeline. One side the per capita consumption of alcohol is increasing on the other side Government revenue from alcohol is also increasing; whether the revenue from this is utilised for some development purpose or again it goes only to produce more alcohol that's a big question mark ?

Note: TASMAC (Liquour Company owned by Government of Tamil Nadu) revene for 2011-12 was Rs. 18, 081.16 Crore with increase of 20.82% and This year Kerala saw Rs. 70 Crore worth sale of alcohol during two onam days. The entire week revenue was approximately Rs .720 Crore. As per the recent study  Punjab tops the sale of alcohol followed by kerala.

RBI Second Quarter Review of Monetary Policy 2012-13

Today (i.e. 30.10.2012) RBI had announced “Second Quarter Review of Monetary Policy for 2012-13”. It had announced in his statement (click here for full statement) that: Based on an assessment of the current macroeconomic situation, we have decided to:

Ø   Cut the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.5 per cent to 4.25 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning November 3, 2012.

Ø   The reduction in the CRR, will inject around `175 billion of primary liquidity into the banking system.

Ø   There is no change in policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility remains at 8.0 per cent.

Ø   Consequently, the reverse repo rate under the liquidity adjustment facility (LAF), determined with a spread of 100 basis points below the repo rate, will continue at 7.0 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.0 per cent.

It had the above mentioned following stands:

i. enable liquidity conditions to facilitate a turnaround in credit growth to productive sectors so as to support growth;

ii. reinforce the growth stimulus of the policy actions announced by the Government as inflation risks moderate; and

iii. anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

Within few hours of RBI Second Quarter Review Finance Minister made following statements to the media:

"Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone," he said in his reaction to the RBI's second quarter policy review. 

He also stated that “Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government commitment to path of fiscal consolidation. I haven't read last few paragraphs of the statement but if it holds out hope for the future I look forward to that future”.

My Perspective:

The RBI stance on Monetary Policy had received many criticism and many economist/analyst are disappointed of its Second Quarter Review. I am not at all surprised by this move of RBI since the reputation of RBI is already at stake. RBI may not have surprised the economy in positive manner but definitely it did surprised the economy in its own ways (of course in negative manner) as it does in the recent past. If one reads the reasons for the policy stance, especially third point "anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation", then one will realise that RBI in its Mid-Quarter Review Statement (on 17th September, 2012) had reduced CRR by same 25 percent and injected Rs. 17, 000 Crore primary liquidity into the banking system. For this stance it had said that "As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations. In this context, the Government’s recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI)."

Many may argue that it was the expectation of the outcome but since it was not achieved RBI had made the current stance. True, the expected outcome had not been Achieved, but, on what basis the current stance of RBI is expecting that it will anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation? The present market situation needs a boost in investments in order to stimulate the economy. No doubt, at the same time we need to have eye on inflation; when one notice the present scenario then one can realise that most of the inflation may be due to failure of supply side boost. Inflation even though most of the times monetary phenomenon, does not mean that only through Monetary Policy measures it can be controlled. RBI again fails to read the situation of the economy and provide appropriate policy measures.

CRR DEBATE – Whether CRR will survive?

During the past few weeks, in the newspapers and televisions, many would have read, saw, and heard that whether CRR is required or it should be abolished? In fact, the close follower of this news would have noticed that the debate was initiated by SBI chairman, Mr. Pratip Chaudhuri and in response to his comment (on abolishing the CRR) RBI Deputy Governor Mr. K. C. Chakrabarty said that CRR is the only and important tool with RBI and it cannot be abolished.

Before going further let us see what exactly CRR is and its purpose?  Cash Reserve Ratio (CRR) is ratio of reserves at which commercial banks must hold or deposit with the central Bank. In other words it is a central bank regulation that sets the minimum reserves that each commercial bank must hold physically in bank vaults or as deposits made with the central bank. This reserve can be maintained either in cash, gold or unencumbered government securities.

The reserve requirement, on one hand, helps the bankers to have enough cash to meet any crisis and on the other hand, they serve as tools for Central Bank to control the liquidity in the system in order to manage the Inflation. When CRR is altered then the interest rates will be changing as per availability of funds with the commercial banks.

Now coming back to the debate that SBI Chairman said Abolish Cash Reserve Ratio, he said that "CRR does not help anybody. It is locked up in the vault and not ploughed back into the economy. It is unfairly applied on banks. If CRR is a liquidity mop-up tool, why not apply it to insurance companies, NBFCs and debt mutual funds, who as well mobilize deposits from the public?" he asked.

After three days of SBI chairman commented the RBI Deputy governor K C Chakrabarty commented that “the banks must work within the frame work of the regulatory norms”. He also said that “If SBI is not protected, the risk may catch other banks leading to a systemic failure and SBI is too big to fail.” He further went on to say that “If the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place”

This row has become a big debate now. Recently, Reserve Bank of India Governor D. Subbarao made a prank up his sleeve at a banking summit in Mumbai. In serious tone he announced that central bank has set up a ‘committee’ to review the need to retain the much-debated cash reserve ratio (CRR)” But when the Governor revealed the names of the committee members and its conditions, people realised he was only joking.  He said that “The members of the committee, Subbarao said, would be Pratip Chaudhuri, Chairman, State Bank of India, and K.C. Chakrabarty, Deputy Governor, RBI. Both, with opposite views on CRR (the percentage of deposits that banks need to keep with RBI), have sparred over the issue.” He also went on to say further that “the two conditions for such a committee would be: First, the two members would be locked up in a room till they come to an amicable solution. And, second, the findings of the committee should not be made public until his own term as Governor comes to an end.”

So let us see the main reason why SBI chairman said CRR is not required. The main reason for it is that CRR has come down from its peak level of 15% in 1994 to 4.75% at present. Few years ago RBI had ceased to pay interest rate on CRR, which affects the commercial banks. This is one of the main reasons why SBI chairman wanted CRR to be abolished. SBI chairman had got some support for his view from Former RBI governor and present chairman of the Prime Minister's Economic Advisory Council (EAC) C Rangarajan; he said on that there is a need to bring down the cash reserve ratio as the instrument is no longer used in credit control and liquidity management. In his own words "We need to move towards a situation in which the level of CRR comes down and it is used as an instrument of credit control only in extraordinary circumstances," he also stated that "As OMO (open market operations) becomes increasingly a major instrument of credit control, the role of CRR as an instrument of credit control will come down,".
 
Here are 2 more articles on this debate 1.     CRR harsh on public sector banks
2.  CRR has outlived utility

My perspective with a Thank Note:

When one reads the debate then one may come to a quick conclusion that SBI governor is right and CRR should be abolished. If CRR is abolished then what are the other tools through which RBI can control credit and inflation? (Even though this is not the only tool to the do this, but one of the major tool for RBI). No doubt as EAC chairmen said that OMO becomes increasingly a major instrument of credit control, but at the same time we cannot ignore or doubt the credibility of CRR. The Problem with commercial banks is few years back RBI had stopped paying interest rates on the cash reserves; this affects the business of the commercial banks, because without any incentive when the cash is kept then it is no use for anybody. RBI need to find a amicable solution to stop this debate, either by paying some interest rates or through some other incentives. 

I wanted to end this big post with a THANK note to all the Visitors who had viewed, read, visited and commented on this blog. Today, with the help and support from all of you, this blog had crossed 4000 visitors (which you can see in the left side of the screen). I Thank  all of you again for giving your support and encouraging me to keep posting in this Blog. THANKS ALL
  

 

Fiscal Deficit in INDIA – Is it worrisome?

The recent discussions on the Economic growth of developed and emerging nations are all talking about fiscal deficit. In the past few months there was debate going on, on India’s Fiscal Deficit. Whether it is acceptable or it’s too high, what may be the consequences, etc. Before going further on India’s fiscal deficit let me come back to the basic definition of Fiscal Deficit.

BASIC  LESSONS:

What is Fiscal Deficit?  

        

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). The components of the fiscal deficit are (a) the revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (that is, excluding borrowing) and (b) capital expenditure. The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market that is mainly from banks).

India's Fiscal Deficit during Eleventh Five Year Plan (2007-12)

2007-08	2008-09	2009-10	2010-11	2011-12
2.5	6.0	6.5	5.2	5.8

Source:  Data Tables, Planning Commission; Note:  2010-11 Quick Estimates and 2011-12 Advanced Estimates

Is Fiscal Deficit is really a necessary evil or is it really bad? Well to answer this question we need to do some introspection about the economic conditions first. It is not easy to say that fiscal deficit is bad or necessary evil for any economy. It depends entirely on the economic conditions of the country. If Government is borrowing money for some productive purpose through which economic productivity will be increased then fiscal deficit is not bad at all. If an economy like India is investing money in infrastructure and social sector (to have better standard of living) which is properly utilized then Fiscal deficit is not bad or evil.

       

Then one needs to understand why many economist say Fiscal Deficit is bad? Fiscal deficit becomes worrisome or bad when it becomes large and persistent for few years. If it becomes large and persistent then it means that Government is spending money (through borrowing) on unproductive purpose that does not stimulate the economy to move further. When there is a large Fiscal Deficit then there is a significant chance for high level of inflation. When there is high inflation and large Fiscal Deficit then it will lead to fall in value of (or) weaker national currency which is turn reduce the credit-worthiness of the country!

My Perspective:

Now coming back to the news that everybody is concerned about Fiscal Deficit and many ratings firms downgraded India by citing the Fiscal Deficit and Inflation. Is India is really doing bad? Well, if one does a good research on this subject then he will find out the real truth! Yes, India's Fiscal Deficit to GDP is high; no doubt in it, but, at the same time India has the capacity to absorb Government Spending (through borrowing). But, what really concerns is that the  Government Spending (through borrowing) is not happening largely in productive manner. This is one of the reasons for the prevailing high level Inflation rate. This does not mean that India is doing badly; this means that India should be more vigilant on the area of spending (through borrowing). India's Fiscal Deficit will be acceptable only when its Government Spending (through borrowing) happens in more productive manner.  

I wanted to clarify, one thing, that in recent past many Economists, Researchers, and Analyst quoted that this much percentage of Fiscal Deficit is acceptable for any economy or some particular economy. But, I personally believe as what I said earlier that it  depends on economic conditions and capacity of the country. There is no benchmark or ideal percentage for the Fiscal Deficit (as a percent of GDP)

What is IIP and Why it is important? - A revision on Economics

The Quick Estimates (QE) of Index of Industrial Production (IIP) (with base
year 2004-05) for the month of May 2012 have been released by the Central Statistics Office of the Ministry of Statistics and Programme Implementation today (i.e.12.07.2012).  The gist of the press release is as follows:

        

The General index stands at 170.2 for the month of May, 2012, which is 2.4% higher compared to the level in the month of May, 2011.  The year on year growth stands at 0.8% for the period of April-May 2012-13 corresponding to the previous year.  The QE shows some of the important items with high positive growth during the current month over the same month in previous year includes “Telephone Instruments including Mobile Phone & Accessories - 22.8%, Air Conditioner (Room) - 30.0%,  Carbon Steel - 23.5%,  Plastic Machinery including Moulding Machinery - 49.6%, Conductor, Aluminium - 58.1%, CR Sheets - 30.1%, Steel Structures - 28.5%, Boilers -28.8%, Purified Terephthalic Acid - 23.3% and Aerated Water & Soft Drinks - 25.1%”.

Some of the other important items showing high negative growth are: ‘Cable, Rubber Insulated’ [(-) 66.6%], ‘Gems and Jewellery’ [(-) 23.4%], ‘Sugar’ [(-) 49.8%], ‘Vitamins’ [(-) 62.2%], ‘Furnace Oil’ [(-) 30.6%], ‘Colour TV Sets’ [(-) 25.9%], , ‘Colour TV Picture Tubes’ [(-) 87.6%], ‘Di Ammonium Phosphate (DAP)’ [(-) 46.9%], ‘Edible Hydrogenated Oil’ [(-) 42.7%], ‘Complex Grade Fertilizers’ [(-) 46.7%] and ‘Textile Machinery’ [(-) 30.5%]. (Source: CSO press release)

When I read the news suddenly 2 questions popped out of my mind they are what is IIP? Why it is important for an economy? Here is the answer for these questions with additional information of how it is compiled in INDIA.

What is IIP?         

The Index of Industrial Production (IIP) conveys the status of production in the industrial sector of an economy in a given period of time, in comparison with a fixed reference point in the past.

In simple words it is an index which details out the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity and manufacturing.

Importance of IIP

As IIP shows the status of industrial activity, you can find out if the industrial activity has increased, decreased or remained same. Today it is important because with the news of recession hovering over the horizon, better IIP figures indicate increase in industrial production. It makes investors and stock markets become more optimistic.

Computation of IIP

The first time IIP used the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 8 times (recent is 2004-05).

They are segregated into 3 broad sections: manufacturing, mining and electricity. They are also classified on the basis of usage: capital goods, basic goods, non-basic goods, consumer durables and consumer non-durables.

At present, IIP is compiled using data received form 16 source agencies viz. Department of Industrial Policy & Promotion (DIPP); Indian Bureau of Mines; Central Electricity Authority; Joint Plant Committee; Ministry of Petroleum & Natural Gas; Office of Textile Commissioner; Department of Chemicals & Petrochemicals; Directorate of Sugar; Department of Fertilizers; Directorate of Vanaspati, Vegetable Oils & Fats; Tea Board; Office of Jute Commissioner; Office of Coal Controller; Railway Board; Office of Salt Commissioner and Coffee Board. Currently IIP comprises of 682 items.