Can We Stall Disinvestment Further?

Ref jay #32

[A uniquely indian reality which the run of the mill economists fail to address is the gold stocks held by the people. One estimate puts the gold at 150 billion dollars, on top of that nearly 2 billion dollars worth is imported legally.]

The IMF estimated that India imports 800 tons of gold a year, most of it going into jewellery. That works out to approximately $8 billion a year, not the $2 billion you mentioned.

Some 20 years back when India finally authorized the export of silver from India, the Wall Street Journal said that if all the silver mines in the world were to be shut down, Indian exports from personal holdings alone could supply the silver requirements of the world for 10 years.

Looks like the sultans of Delhi (both the Mughal and the British kind) couldn`t and didn`t get the last rupee out of Indian hands.

Ref dost-mittar #35

[I dont think anyone can separate an Indian woman from her gold, Morarji Desai tried his level best when he was the Finance Minister, and failed.]

Walk along the streets in Hong Kong or Singapore and you can make the same statement about the Chinese and gold. The fact of the matter is gold ornaments along with silver are the only tangible, portable, liquid assets that the war-ravaged Chinese and Indians know. That being the case, you will not be able to separate them from their one source of security in an uncertain world. Paper currencies become worthless during wartimes (remember when Germans used to take wheelbarrows full of marks to buy a loaf of bread during the Weimar Republic?) or when new countries are formed out of old ones (how did Bangladeshis get new takas for their Pakistani rupees and what did the Bangladesh government do with the worthless Pakistani rupees?) and modern coins are no longer made of silver or gold with intrinsic value. So expect all prudent people to hoard gold.

[aamdani athanni kharcha rupaiyya..in pakilands case that would mean aamdani chavanni kharcha dedh rupaiyya]

LOL. :)

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dost-mitter 29,

A uniquely indian reality which the run of the mill economists fail to address is the gold stocks held by the people. One estimate puts the gold at 150 billion dollars, on top of that nearly 2 billion dollars worth is imported legally. Some how this dead resource has to mobilised into some kind of capital asset. May be indexed pension against gold, some innovative secritisation instrument.

I always believed that real progress of india will start only when share certificates are used as disply items at marriage instead of jewellary, when non gold jewellary is more popular thatn the gold one as in the west.

All this precoccupation with FDI and risk rating are mere mimicing of the west, some thing as far as possible every indian academic should resist.

Pankaj # 30
Neither is DRDO not is the Atomic Energy program funded by the Defense budget. The research and development mentioned in the link you mentioned is probably the three services own research work. Here is the link to the union budget. http://indiabudget.nic.in/ub2002-03/eb/stat02.pdf
We can expect the defense budget to show a sharp increase as we start deploying all the defense systems being developed.

Regards,

Faruk

Ref Hydra #27

[if Pakistan is 1/7th the size of India even if it spends TWICE the % percentage in Defence they are lees than SEVEN TIMES more percentage % of budget that they should be spending if they wanted parity .]

Why do you want parity?

[Doesnt small percentage of ALRGE number still is bigger number than large % percentage of a small number]

Nobody needs math lessons from you. The question is why Pakistan wants parity with India. Why can`t you guys be happy with less?

Faruk

Okay I did some search and here are the details for 2000-2001 defense budget of India:

``
http://www.indianembassy.org/policy/defense/india_defense_budget_2000.htm

Projected Defense Expenditure
Rs.58, 5870 million ($13.4 billion)

Percentage of GDP
2.68%

75% of India`s defense budget is to be spent on pay & allowances, training, welfare and exercise.

Research and Development accounts for 5.3 % of overall allocation. The expected expenditure on pensions itself is greater than the total naval budget. ``

I still dont know whether purchase of armaments from ordinance factories is included in the budget. But the budget for DRDO is, I guess, a part of the defense budget under Research and development. It also says that we do end up spending 75% of the budget on salaries and pensions. If the expenditure on RAW and other miscellaneous expenditures are kept outside the defense budget, then the real budget should be larger than $13.4 bn. Also then the ``real percentage`` spending on salaries and pensions as a part of the ``effective budget`` would also come down such that more amount of money is available for maintenance, Research and development and acquisitions. Say 70% of the effective budget of $15 bn is spend on salaries. Then $4.5 bn is available for the aforementioned tasks which seems to be more reasonable than our previous estimate of $2.8 bn.

Pankaj # 25
Expenditure on DRDO and other research organizations is not included in the defense expenditure. RAW has its own budget. The ordinance factories have their own budget. So this figure of $14 billion is definitely misleading.
We should expect the defense budget to shoot up in the coming five years when the missile systems being developed are deployed. We simply have to get rid of these white elephants to maintain a growth rate above 5%.

Regards,

Faruk

Stuka

``I know I can get Defence budgets comparatively easily. The figures that interested me was the 80% of the budget component going into salaries and pensions. Do other defence forces have similar manpower wage constraints?
``

I have a general feeling that a large percentage of Indian budget goes to salaries and pensions and other other fringe benefits. However I am sceptical about the figures like ``80%`` generally thrown around without adequete details of what all things they include in that 80%. The reason I am sceptical is because of the following logic:- The per capita expenditure of Indian army is definitely not more than that of Pak Army. At best it can said to be comparable. Now a figure of 80% would imply that $11.2 bn out of $14 bn goes towards meeting salary and pension expenditures which leaves a meagre $2.8 bn for weapon acquisition, armaments, maintenance, purchasing spares, funding DRDO research programs, funding RAW and old equipment upgrade. If you add up typical costs incurred in all of the above it will easily overshoot the figure of $2.8 bn with maintenance, armament purchase and continuous upgrades topping the list. Secondly, the personnel ratio of Indian Army to Pak Army is around 2:1. Assuming similar per capita expenditure, Pak Army should be spending 11.2/2 = $6.1 bn on salaries and pensions. This is clearly at least 70-80% larger than the entire Defense budget of Pakistan what to say of salaries and pensions. This makes me suspicious when they throw around dubious figures such as ``80%``; they should give more details on what all things are they actually including in these figures and it is definitely not the salaries and pensions only. Anyway I am habitually sceptical of people who ``throw around figures`` without proper substantiation. Statistics, they say, is like a mini skirt; it reveals what is interesting but conceals what is significant :-)

Ref harimau #23

Well... nobody in Pakistan is trying to tell India what to do to improve its condition. They can well understand their own plights and problems. Why to write whole article then? And as far as Muslims cant live with others, May I ask wats going on in Gujrat and incidents in churches some time ago in India. I dont want to blame any religious group for anything. Fanatics have always been hijacking religions. Thanx

Pankaj

I know I can get Defence budgets comparatively easily. The figures that interested me was the 80% of the budget component going into salaries and pensions. Do other defence forces have similar manpower wage constraints?

Ref meet_taimoor #19

[Countries like India and Pakistan are facing huge economical problems due to their own stubbornness. If India and Pakistan cut down their defence spendings, I guess, economic management (and life of common man) will become quite easier.]

Pakistan spends twice as much as India does on Defense as a percentage of its total budget.

The Pak Army is twice as big now as it was before Bangladesh was liberated. Twice the army for half the country.

These are facts that Fakhrs in Pakistan do not want to address.

Do not try to tell what India should do to keep its economic house in order.

[But, the hatred in the heart against each other is so deep-rooted, that only a miracle can change the attitude of the two countries. So, lets live with these circumstances.....]

It goes back to your basic TNT, that Muslims cannot live with Hindus. Now it is Muslims cannot live with Christians, they cannot live with Ahmadiyyas, they cannot live with Shias. Soon, it will be, they cannot live with each other.

Rating agencies,

In the blind adulations and infalliability of the rating agencies, khan the teacher should include the info that enron and worldcom were rated AAA by these agencies in his lectures. It is pathetic and shameful that people like khan are simply mouthing the views of american with out being able to take into account the ground realities in india. Even more disguecting that he poses as a teacher in india, supposed to have a mind of his own.

Here is a relevant article

http://hindustantimes.com/news/181_87463,0002.htm

Fiscal deficit ``unacceptably high``: Vajpayee
Reuters
New Delhi, October 19

Prime Minister Atal Behari Vajpayee said on Friday the fiscal deficit of the central and state governments was ``unacceptably high`` and had hurt the country`s economic development.

The combined fiscal deficit of the central and state governments is close to 12 per cent of India`s GDP, leaving little funds for development activities in a country where more than a quarter of the billion-plus people live in poverty.

``The fiscal deficit of the centre and states together is unacceptably high. It has seriously affected our country`s economic and social development,`` Vajpayee told a conference of state chief ministers.

``It (fiscal deficit) has widened the gap between people`s expectations and the system`s ability to fulfil them,`` he said.

Vajpayee`s comments came after international rating agency Standard and Poor`s downgraded the country`s local currency ratings last month to junk status, citing the country`s high deficit levels.

It also blamed a swelling debt burden and vulnerable public finances for the downgrade and said continued big fiscal deficits and a ``languid pace of economic reform would lead to a further ratings downgrade``.

Vajpayee stressed the need for a broader political consensus on crucial developmental and governance reforms to achieve better fiscal discipline and higher economic growth rates.

India undertook economic reforms back in 1991, but the process has lost momentum because of opposition from political parties, trade unions and bureaucratic hurdles.

Parliament has yet to approve several key plans, such as cutting government stakes in state-run banks, labour reforms and proposed legislation to curb the soaring fiscal deficit.

Failed to meet targets

The chief ministers` conference failed to arrive at a consensus to freeze payment of an allowance to government employees to offset inflationary pressures and a bonus which would have translated into a saving of 18 billion rupees annually for the cash-strapped government.

Successive governments have shied away from taking harsh economic decisions for fear of losing mass support in a country where political compulsions often override economic logic.

India has failed to meet its fiscal deficit targets consistently in the past as government spending exceeded revenue receipts, leading to massive borrowings.

The International Monetary Fund has expressed concern over India`s high fiscal deficit which is one of the largest in the world.

The government overshot its target in 2001/02 due to lower-than-expected revenues, ending at 5.7 per cent of GDP but has set a target of 5.3 per cent in the current year.

The government has said it expects the economy to grow at 5.5 per cent in the year to March 2003, putting it among the world`s fastest-growing, but the rate would be still short of double-digit levels needed to cut poverty levels.

While industrial output, exports and revenue receipts have picked up in recent months, India is also reeling under the impact of its worst drought in 15 years.

Analysts say the effect of the drought could lead to a widening of the deficit as the government spends more on rural relief and rehabilitation. It is yet to announce an estimate of the drought damage.

arjun_m # 13

You said :Private companies investing in India will bring their own money.

This is not always true. Large FDI projects are generally funded by banks and insured. Both look at the destination countries credit rating.

Regards,

Faruk

Countries like India and Pakistan are facing huge economical problems due to their own stubbornness. If India and Pakistan cut down their defence spendings, I guess, economic management (and life of common man) will become quite easier. But, the hatred in the heart against each other is so deep-rooted, that only a miracle can change the attitude of the two countries. So, lets live with these circumstances.....

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Stuka

``Does anyone have similar figures for other countries? Since defence expenditure is ``unproductive`` expenditure, is there any way to free up that capital for investment purposes?
``

It is very easy and a simple search on the google will give you the relevant data. From my own knowledge(memory), I can say that the defense expenditures of India recently reached around 2.7%-3% of GDP. The total annual defense expenditure of India is around $13-$14 bn as of now and the latest Indian GDP is around $470 bn. Thus the percentage of GDP expenditure of India is moderate when compared with the other countries of the world(2.5% to 3% GDP on average) and definitely not on the higher side. Just to put the matter in proper perspective Pak`s real defense expenditure is aroud #3bn to $4 bn(though officially they claim it to be slightly lower than $3 bn) which is roughly around 5% of their GDP(Pak GDP: $62 bn) or higher.

PS No, there is no easy way to ``free up`` this capital for investment unless most of the defense manufacturing is done in-house. For example if you decide to place the order for buying 200 jets with an Indian company, the defense budget remains inside the country and increases purchasing power of people by providing employment and thereby stengthening economy by virtue of ``multiplier effect``.

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Welcome to Chowk, Mr Khan.

It is interesting to read that 80% of the defence budget goes into paying salaries and pensions. That means there is not much flexibility in reducing defence expenditure without downsizing the forces.

Does anyone have similar figures for other countries? Since defence expenditure is ``unproductive`` expenditure, is there any way to free up that capital for investment purposes?

Good article. I don`t want to defend the indefensible which is the sacred cow (or milch cow whichever way you want to look at it) of the politicians viz. the public sector and subsidies. However, I think we should also be wary of the rating agencies. Remember how they encouraged the Asean nations to float their currencies and when the bottom fell out, tons of money was made on arbitrage. India, like China, were not affected because currency was not floated.

One other thing to point out. Bad as it may sound, we need to spend to bring development to underdeveloped areas out of the public coffers, else we are looking at a lot of instability as manifested in states like Bihar. The trick is to get it to go to the right areas and make a difference, which is easier said than done.

India, like China, has critical mass to become an economic power in it`s own right because of sheer size and population if pragmatic economic policies are followed. Rating agency advice should be studied carefully, debated and acted upon with caution but should not be construed as pearls of wisdom dropping from the heavens.

Jay # 5
What you are saying has merit, but remember that international trade will rise from 2% of our GDP to about 7 % in the next five years. India needs to be very weary of International credit rating far various reasons. For one we have 21 companies listed on the Nasdaq right now, we will have probably 10 times as many listed in the next five to 10 years.
We need large amounts of expenditure in infrastructure roads, power plants, dams and you name it. Its imperative that we attract foreign investment in these areas and whoever invests in these areas will have to borrow money.
A lot of multinational companies are looking at India as a site for not only offshore software development but a site for the entire back office, financial services, health management services, HR, pay roll etc. These firms look at the credit rating of a nation to avoid a south America like situation,
We have to bring down the deficit to below 5% of GDP and create a environment that enables our business to borrow money cheaply. We have to be the most attractive place to invest from all accounts to achieve a growth rate of 8%.

Regards,

Faruk

Re: Article
Thank you Mr. Khan for a wonderful and timely article. There is no gainsaying that we just have to sell our white elephants. No one denies that it’s a need and we have some $40 billion tied in these institutions and we spend money to keep them alive. But selling them has its own challenges. United Airways has 40 employees per aircraft. Air India has 8000 per aircraft. The buyer will have to retrench most of these employees to be profitable. It’s the same story with the other public sectors. This as we all know is not easy in India.

Regards,

Faruk

Khan,

I wonder what kind of economics you teach. Most of the indian soveregn debt is either bilateral or multilateral and has nothing much to do with the rating agencies. Hardly any company in india borrows in the world open market. Indian saving rate is more than 20 percent while say that of US is less than 1 percent. There is enough of rupees to go around.

Divestment is good only to improve efficiency in the public sector, not to improve the credit rating. Crdit rating has next to zilc effect on the indian economy.

A timely, well-written article. The public sector was a worthy cause once upon a time. Now, we ought to thank Nehru for all he did, and get out of these inefficient entanglements.

Can we divest quickly enough to achieve our potential? I am not very hopeful.

We are doomed to making a slow progress - much slower than our abilities actually entitle us. When everybody thinks of himself or herself as a king or a queen, nothing can happen very quickly.

Undoubtedly an excellent article. However, it is amazing that last year`s downgrade in S&P and Moody sovereign ratings did not do much to affect foreign direct investment, which in fact reached record highs in `02. Forex reserves in October `01 totalled $44 billion, and this year $58 billion...this reflects the impressive work of the RBI and maturity of the Indian forex markets. Perhaps it will be recreated the coming year as well.

If I remember rightly, at the time of the 1991 crisis, India took upon itself the full burden rather than default on any loan obligation, and met all its obligations on their respective due dates. Is India in a condition to fulfil its obligations in fiscal 2002-2003? Gujurat earthquake, UTI payment crisis, Indian Parliament attacks.. what next. BTW, if we see a leap in oil prices, will India`s forex reserves be sufficient to fight the crisis?

Wish we could see a GDP of more than 7% and economic growth that would be the pride of Asia. Maybe some day.

...nice article mr. khan....divestment is caught up in politics as everything else is in india...how do we make progress on anything when we effectively need a billion people to agree on everything?...sometimes democracy makes doing anything painful...but the alternative is worse, so we must live with it...divestment will happen in fits and starts...the credit ratings will bounce up and down...on average the trendline will point upward, as long as the clowns running the government can maintain some political stability...indian enterprise and technical talent will take care of the rest...