Indias Big Government

&

How It is Hurting You

Vivek Kaul, Editor
 Indias Big Government and How
It is Hurting You
- By Vivek Kaul

Nations stumble upon establishments, which are indeed the result of human action
but not the result of human design Adam Fergusson

Sometime I back read a wonderful book called When Breath Becomes Air written
by Paul Kalanithi. Kalanithi was an Indian American doctor who one fine day
realised he had lung cancer and wrote a book documenting his life and how he
went about fighting the disease. In the end he could not complete the book. His
wife wrote the last chapter.

During a particular stage of his disease when Kalanithi was going through a
really tough time, a pantheon of specialists (gastroenterologists, endocrinologists,
infectious disease specialists, oncologists, neurosurgeons etc.) got involved in
treating him.

And this created a major problem. As Kalanithi writes: During lucid moments,
I was acutely aware that with this many voices, cacophony results. In medicine, this
is known as the WICOS problem: Who Is the Captain of the Ship? The nephrologists
disagreed with the ICU doctors, who disagreed with the oncologists, who disagreed
with the gastroenterologists.

WICOS is not a problem that is limited to medicine. It plagues many institutions

including governments, with different people trying to lead the institution in
different directions. In September 2013, when the Bhartiya Janata Party(BJP)
chose Narendra Modi to lead it in the 2014 Lok Sabha elections, one thing that
became immediately clear was that if Modi won, the government he would form
would not have a WICOS problem.

2 | Indias Big Government and How It is Hurting You

 He would be the true leader of the government unlike the Manmohan Singh
government, which was basically run through the backseat driving of Sonia Gandhi
and her team of advisers.

This belief came from the way Modi had administered the state of Gujarat for
more than a decade, with three terms as a chief minister. The state was run largely
out of the chief ministers office by bureaucrats, with Modi himself holding most of
the important ministerial portfolios.

These days buying something as simple as a mobile phone can be a topic for a
PhD thesis with so many permutations and combinations having to be taken into
account. Okay, I am going a bit overboard here...But hope you get the drift dear
reader...

During the course of campaigning for the 2014 Lok Sabha elections Modi had
also said: I believe government has no business to do business. The focus should be
on Minimum Government but Maximum Governance.

Given that there was no WICOS problem associated with Modi, people believed
what he said. They thought that finally they would for the first time see the Indian
government get out of business and concentrate on areas that it should.

But nearly two years later that hasnt turned out to be the case.

The government continues to run Mahanagar Telephone Nigam Ltd (MTNL),

a telephone company. The company has made losses of close to Rs 5,000 crore
between April 1, 2014 and March 2016. The real losses of the company would have
been higher if the company hadnt earned Rs 458.04 crore from surrendering the
spectrum it used for its CDMA operations, back to the government. The company
discontinued its CDMA operations from March 1, 2016, onwards. Further, taxes of
Rs 492.96 crore for an earlier period have been written back.

The government continues to run Air India. The airline has made losses of
thousands of crore over the years. Just in 2014-2015, the airline lost close to Rs
6000 crore.

Sourced from http://www.narendramodi.in/minimum-government-maximum-governance-3162.

Indias Big Government and How It is Hurting You | 3

 The government even runs a hotel chain called ITDC. It runs a company which
manufactures scooters (Hindustan Scooters Ltd). And close to where I live there
is the Bicycle Corporation of India. Oh, and if all that wasnt enough, the Indian
government even makes condoms.

In fact, the losses of these companies are borne by the government, which
means the taxpayer, which means you and I, who pay various kinds of taxes to the
government.

The Economic Survey of 2015-2016 estimates that accumulated losses of public

sector enterprises up until 2013-2014 had stood at Rs 1.04 lakh crore. As per the
Public Sector Enterprises Survey for 2014-2015, the total losses of loss making
public sector enterprises, for the year ending March 31, 2015, amounted to Rs
27,359.82 crore.

In fact, the losses of the top ten loss making central public sector enterprises(CPSE)
amounted to Rs 23,379.72 crore. The losses of these enterprises made up for 85% of
the total losses, as can be seen from the following table. The likes of Bharat Sanchar
Nigam Ltd(BSNL), Air India and MTNL, make up for a major part of losses.

The total number of loss making firms were 77 in number, up from 70 in 2013-
2014. The number of profit making firms decreased from 164 to 157. This basically
means that one -third of public sector enterprises are loss making.

4 | Indias Big Government and How It is Hurting You

 10 Major Loss Making CPSE's as on 31.3.2015
( in Crore)
Net Loss % age
SI.No. CPSE Name
2014-15 share
1 Bharat Sanchar Nigam Ltd. -8,234.09 35.22
2 Air India Ltd. -5,859.91 25.06
3 Mahanagar Telephone Nigam Ltd. -2,893.39 12.38
4 Hindustan Photo Films & Mfg. Company Ltd. -2,164.36 9.26
5 Mangalore Refinery & Petrochemicals Ltd. -1,712.23 7.32
6 Hindustan Cables Ltd. -932.99 3.99
7 STCL Ltd. -412.59 1.76
8 Fertilizers & Chemicals(Travancore) Ltd. -399.91 1.71
9 Air India Engineering Services Ltd. -389.5 1.67
10 Hindustan Fertilizers Corporation Ltd. -380.75 1.63
Total (1 to 10) -23,379.72 85.43
Net Loss of loss making CPSEs: -27,359.82 100

Source: Public Sector Enterprises Survey 2014-2015

Hence, the overall accumulated losses of public sector enterprises stand at more
than Rs 1,31,000 crore, if we add the number put out by Planning Commission with
the number available in the Public Sector Enterprises Survey.

The interesting bit here is that not all of this is accounted for in the budget. As
economist Jaimini Bhagwati wrote in the Business Standard: Funds will be provided
to support continued losses in public sector undertakingssome of which are not part
of the Budget. 2

Hence, the government spends thousands of crores every year to keep running
the loss-making companies, in order to sustain the livelihood of around 2.5 lakh
people.

The question is why is the government mollycoddling 0.02% of the nations

J. Bhagwati, Illusory Budget Numbers, March 16, 2016, Business Standard.

Indias Big Government and How It is Hurting You | 5

population3, when the money going towards sustaining the losses of these companies
can easily go somewhere else.

This is basically a crime in a country as poor as India is. As Bill Bonner writes
in HormegeddonHow Too Much of a Good Thing Leads To Disaster: As a society
grows richer it can afford more illusions, more entertainments, more re-distribution of
wealth, more regulation, higher taxes, and more unproductive people." 4 India clearly
can't.

Further, every rupee that goes towards keeping these companies going is taken
away from some other area. Take the case of agriculture. After the budget for 2016-
2017 was presented in end February 2016, the government made a lot of song and
dance about the budget being a farmers budget.

But what it really did was essentially change the way it accounts for things.
Economist Ashok Gulati explained this in a column in The Financial Express. The
department of agriculture, cooperation and farmers welfare was likely to spend Rs
15,809 crore in 2015-20165. The allocation for 2016-2017 has been increased to Rs
35,983 crore. This is a jump of a whopping 127%. Or so it seems.

But there was a trick that the government has used here. A jump of Rs 15,000
crore in allocation is primarily because of subsidy on short-term credit to farmers
that needs to be paid to banks. This allocation earlier came under the department of
financial services and has been moved into the budget of department of agriculture
only in the 2016-2017 budget.

After we adjust for this new allocation, the actual jump in money being spent
on agriculture and farmers, was around 33% more. The point being that even
more real money could have been allocated to agriculture and farmers, if the
government wasnt continuing to finance the losses of public sector enterprises.

Also, it needs to be pointed out here that the loss making public sector enterprises,
can be used to generate revenue for the government in another way. As the Economic
Survey for 2015-2016 points out: Most public sector firms occupy relatively large
Assuming a population of 129.5 crore in 2014, as per World Bank data
4
B.Bonner, HormegeddonHow Too Much Of A Good Things Leads To Disaster,
(United States of America: Lioncrest Publishing, 2014).
5
Ashok Gulati, Budget 2016: Sleight of hand in the farm sector, The Financial Express, March 1, 2016.

6 | Indias Big Government and How It is Hurting You

tracts of land in desirable locations. Parts of this land can be converted into land banks
and made into vehicles for promoting the Make in India and Smart City campaigns.
If the land is in dense urban areas, it could be used to develop eco-systems to nurture
start-ups and if located in smaller towns and cities, it could be used to develop sites for
industrial clusters.

In fact, to start with the government needs to make a proper inventory of the
total amount of land that it owns directly and through the various public sector
enterprises. This land then needs to be gradually sold and the money thus generated
can go into an infrastructure fund, which can be used to build physical infrastructure
like roads, bridges, railways, ports etc.

While the Modi government has talked about this (given that it is a part of the
Economic Survey) no concrete steps have been taken up until now. One reason
for this perhaps is the fact that Modi had revived a few state level public sector
enterprises when he was the chief minister of Gujarat. And he perhaps believes that
he can repeat the same at the national level as well.

But more than two years down the line that doesnt seem to be the case. In the
past government have stayed away from genuine privatisation of public sector
enterprises by selling out lock, stock and barrel, and stuck to selling shares on the
stock market, primarily because the employees protest.

These protests then tend to get picked up in the media and by the opposition
parties and soon the government is on the back foot.

And then there are the banks

Further, the government has also been infusing capital into the 27 public sector
banks that it owns. Between 2009-2010 and September 2015, it had infused Rs
1.02 lakh crore into these banks. Since then more money has been infused into the
banks. In 2016-2017, the government plans to infuse a further Rs 25,000 crore into
the public sector banks. This infusion needs to be carried out in order to ensure
that banks have enough capital after writing off loans that they had given out but
werent repaid and they couldnt do anything about recovering them.

The question is why does the government need to own 27 banks? One can
understand the government wanting to own banks in order to fulfil its social

Indias Big Government and How It is Hurting You | 7

obligations. But it definitely doesnt need 27 different banks to achieve that.

The history of banking in India shows that the government constantly needs to
keep recapitalizing the banks that it owns. A major reason for this lies in the fact
that politicians force these banks to lend to crony capitalists who are close to them.
These businessmen default on the repayment and then the government comes
around to recapitalize these banks.

The only way to stop this is to ensure that most of these banks are no longer in
the control of the government. This can only happen if these banks are privatised.
Once the control of these banks goes outside the government, the chances of them
being professionally run, will go up dramatically.

This will also be a huge blow to crony capitalists who essentially have a good time
on depositors money. Of course, any attempt to privatize public sector banks will
be met with a lot of resistance from the employees. As per the Economic Survey of
2015-2016, around 87,000 employees work for these banks.

This resistance needs to be fought by the government, given that privatisation

of a majority of public sector banks will ensure that the government does not have
to continue to recapitalize these banks every few years. And this will work towards
the greater good of the population at large. The government can also spend more
money towards neglected areas like agriculture, education and health.

In fact, such is the fear of bank employees protesting every time they hear the
privatisation word, even when the government wanted to create some competition
for public sector banks, instead of privatising these banks, it gave away new licenses.

As the Economic Survey of 2014-2015 points out: A primary concern of the health
of the banking sector in India has been lack of sufficient internal competition. Private
banks have slowly been brought into the arena since 1990. It is important to note that
Indias approach was not privatisation of public sector banks, rather it was based
on allowing entry of new private banks. This strategy worked reasonably well in the
telecommunication and civil aviation sectors but did it work in banking? The results
have been mixed.

The fact that the government has had to pump Rs 1.02 lakh crore into the

8 | Indias Big Government and How It is Hurting You

public sector banks over the last few years, clearly tells us that the results have
been mixed overall, and things have clearly gone bad for the government. While the
banking footprint in the country has expanded, the government has had to bear a
considerable cost for constantly having to recapitalize public sector banks.

With benefit of hindsight it can safely be said that the government would have
been much better off, if it had sold off some of these banks back in the 1990s, l,
along with giving licenses for new ones.

In fact, genuine privatisation (referred to as strategic sale in government

terminology) has generated very little revenues for the government over the years.
It is worth pointing out here that of the total of Rs 1.9 lakh crore revenue that
the government has generated through the disinvestment route since 1991, only
Rs 6,344 crore has come through the strategic sale of equity. And this happened
between 1999 and 2004, when Atal Bihari Vajpayee was prime minister and Arun
Shourie, the disinvestment minister.6

I think another major reason for very little genuine privatisation seems to have
taken place lies in the fact that every government has to accommodate many
leaders as ministers. This has especially been true since the 1990s when coalition
governments have become the norm in India.

And how good is a minister with no public sector enterprises under him. Take
the case of the Civil Aviation minister, how much value he would have with Air
India not continuing to be government owned? Or how much value the telecom
minister would have without MTNL and BSNL, the two government owned telecom
companies, continuing to be government owned.

Hence, understandably there is a resistance at the level of ministers as well as

bureaucrats, to the entire idea of privatisation. While the Modi government is also
a coalition government, the BJP has the numbers to run the government on its
own. Hence, it is not really dependent on its coalition partners like almost every
government before it was, since 1989.

Given this, if there was any government that could have pushed through
privatisation, it had to be this government. Nevertheless, that doesnt seem to be
on the agenda at all. In the recent past, it has been hinted that the government is

6
Ashok Kumar Bhattacharya, Goodbye to Privatisation, October 27, 2015, Business Standard.

Indias Big Government and How It is Hurting You | 9

looking to privatise IDBI Bank. But that hasnt happened. Only recently the Life
Insurance Corporation(LIC) of India came to the rescue of the troubled bank by
increasing its investment in the bank and helping it meet its capital requirements.

The insurance major now owns 14.37% in the bank. In fact, in the recent past LIC
has picked up stakes in many public-sector banks to help them meet their capital
requirements. As a March 29, 2016, news-report in The Financial Express points
out that since the start of 2016, LIC has brought into preferential allotment of as
many as six banks, supporting the fund-raising requirement of these banks in turn. 7

As of now it can safely be said that Narendra Modi has abandoned the minimum
government model that he had promised to this nation in the run up to the elections
that made him the prime minister of India.

The oil windfall

When Modi took over as the prime minister of the country in May 2016, oil prices
were quoting at greater than $100 per barrel. On May 26, 2014, when Narendra
Modi was sworn-in as the prime minister of India, the price of the Indian basket of
crude oil was $108.05 per barrel.

Since then the price of oil has fallen dramatically as the Saudi Arabia led
Organisation of the Petroleum Exporting Countries(OPEC) has cut production
and ensured low oil prices, in order to kill the emerging shale oil industry in the
United States. This benefitted India tremendously given that we import around
80% of the oil that we consume.

Interestingly, the Modi government did not pass on a major part of this fall in the
price of oil to the end consumer. Since November 2014, it has increased the excise
duty on oil nine times. In May 2014, the price of petrol in the city of Mumbai was
Rs 80 per litre. In mid-April 2016, nearly two years later, petrol was retailing at Rs
66.39 per litre or 17% lower.

During the same period, the price of oil fell by 62.5% to $40.6 per barrel. So
a 62.5% fall in the price of oil has led to just a 17% cut in the price of petrol.
In fact, oil prices had even reached the mid twenty levels. Along with the Modi

7
The Financial Express, LIC on share-buying spree, raises stake in IDBI Bank, Dena Bank, March 29, 2016.

10 | Indias Big Government and How It is Hurting You

government raising excise duty, most state governments have also raised the value
added tax(VAT) on petrol and diesel.

By doing this, the governments have essentially denied the benefit of lower oil
prices to the end consumer. In a March 2016, Soumya Kanti Ghosh, the chief
economist of the State Bank of India estimated, that if the Modi government hadnt
raised the excise duty on petrol and diesel nine times, it would have benefited
the consumer to the tune of Rs 90,000 crore. This could have provided additional
demand in the economy to the extent of 1% of GDP, Ghosh further pointed out8.

Hence, the government meddling around with prices essentially came at the cost
of lower economic growth. Money in the hands of people is always much better
spent, in comparison to money in the hands of any government.

The Modi government just chose the easy way of raising money. The harder way
would have been shutdown or sell out loss making public sector enterprises and
banks. The land that these enterprises own could have been sold to raise a lot of
money. Over and above all this, the government owns 11.19% stake in the cigarette
maker ITC, through the Specified Undertaking of the Unit Trust of India. This stake
as of June 9, 2016, was worth around Rs 31,776 crore. Why does the government,
which runs anti-tobacco advertisements, continue to own a cigarette maker?

The easy money gathered from increasing the excise duty on petrol and diesel
essentially allowed the government to continue running loss making public sector
enterprises. In 2014-2015, the government had hoped to raise Rs 63,425 crore
through the disinvestment route. Of this Rs 43,425 crore was expected to be raised
from selling shares in government owned companies. The government managed
Rs 26,353 crore on this front. This was possible after considerable help from LIC,
which is on a perpetual rescue mode for the government.

Rs 15,000 crore was expected to be raised from selling of shares the government
owns in non-government companies. Not one rupee was raised on this front.

In 2015-2016, the disinvestment target was raised to Rs 69,500 crore. Of this Rs

41,500 crore was to be raised through sales of shares of public sector enterprises.
The government managed to raise Rs 25,312 crore, with more than a little help
from LIC again.

8
Soumya Kanti Ghosh, If wishes were horses, Ecowrap, March 17, 2016.

Indias Big Government and How It is Hurting You | 11

 The Rs 28,500 crore that it wanted to raise through strategic disinvestment proved
to be a non-starter.

At the same time, the windfall from oil allowed them to put more money in
recapitalizing public sector banks. For 2016-2017, the government has budgeted
Rs 25,000 crore for further capital infusion into these banks.

As the finance minister Arun Jaitley said in the budget speech he made in February
2016: If additional capital is required by these Banks, we will find the resources for
doing so. We stand solidly behind these Banks. This was Jaitleys way of saying that
the government will do whatever it takes to keep these banks going.

This builds in a tremendous amount of moral hazard into the entire system.
Economist Alan Blinder writing in After the Music Stopped says that the central
idea behind moral hazard is that people who are well insured against some risk are less
likely to take pains (and incur costs) to avoid it. 9

Hence, if the government keeps infusing capital into public sector banks and
keeps rescuing them when they are in trouble, there is no real incentive on part of
public sector banks to run a responsible, viable and a profitable business. This is
moral hazard at play. It is not surprising that as of the end of March 31, 2016, the
gross non-performing assets of listed public sector banks stood at Rs 4.77 lakh crore
or 9.32 per cent of their total advances. 10

The government is keen to hold on to these banks. As the Economic Survey for
2015-2016 pointed out: The return on assets for most banks is currently less than
one third of the norm of 1 per cent that is considered reasonable. Many, though not all,
of the less profitable banks are those with smaller levels of employment. Despite this,
the government remains obsessed with the idea of owning 27 public sector banks.

This is particularly dangerous given that these banks will continue to need a lot
of money in the years to come. The estimates made by the PJ Nayak Committee
suggests that between January 2014 and March 2018 public sector banks would
need Rs. 5.87 lakh crores of tier-I capital. The committee further said that:
assuming that the Government puts in 60 per cent (though it will be challenging to
9
A.S. Blinder, After the Music StoppedThe Financial Crisis, the Response and the Work Ahead
(New York: The Penguin Press, 2013)
10
Sourced from http://164.100.47.190/loksabhaquestions/annex/9/AS82.pdf

12 | Indias Big Government and How It is Hurting You

raise the remaining 40 per cent from the capital markets), the Government would need
to invest over Rs. 3.50 lakh crores.

The government on the other hand estimates that the capital requirement of extra
capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. The
question is where is so much money going to come from? Jaitley did not get around
to explaining that in his budget speech.

Meddling with steel prices and much more

Other than meddling with oil prices, the government has been meddling with steel
prices as well, in order to protect the domestic producers of steel against Chinese
dumping of steel.

On February 5, 2016, the directorate general of foreign trade(DGFT) imposed

a minimum import price(MIP) on 173 steel products. The prices range from $352
per tonne to $752 per tonne of steel.

The MIP was imposed in order to counter the dumping of cheap Chinese steel
and to help the Indian steel companies.

Stock analysts labelled this move of the government as a gamechanger for the
steel companies. But that is a very limited way of looking at things.

As Henry Hazlitt writes in Economics in one Lesson: The tariff has been described
as a means of benefitting the producer at the expense of the consumer. In a sense this
is correct. Those who favour it only think of the interests of the producers immediately
benefited by the particular duties involved. They forget the interests of the consumers
who are immediately injured by being forced to pay these duties. 11

A tariff is essentially a tax or a duty that is paid on imports of exports. In the case
of the minimum import price on steel imports, no duty has been fixed or tax has to
be paid. But given that the minimum import price will force consumers of steel to
buy steel at a higher price from Indian steel companies, it basically means that the
companies are being forced to pay more than they would have, if this move had not
been made. In that scenario they could have simply imported cheaper steel, which

11
H.Hazlitt, Economics in One Lesson, (New York: Three Rivers Press, 1979)

Indias Big Government and How It is Hurting You | 13

they can still do but at a higher price. Hence, an MIP is basically a tariff.

Steel is an input into many different sectors from automobiles to real estate to
engineering to construction and infrastructure. Hence, if the price of steel goes
up, companies operating in these sectors need to pay more when they buy steel.
And this in turn will impact the prices of the consumer goods that these companies
produce and the physical infrastructure that they create. This is the unseen negative
that people are not talking about.

Take the case of engineering goods, which is as of now, Indias number one export.
As TS Bhasin, Chairman of EEPC India, an engineering goods exporters body,
said after the MIP was introduced: The MIP will raise the cost of raw materials for
engineering products by about 6-10 per cent. This will severely hurt engineering exports.
12
How will Indian engineering companies compete globally in an environment of
slow global economic growth, if steel is made expensive?

Long story shortcheaper steel is good for the Indian economy. Yes, the Indian
steel industry will suffer, but the overall benefits for the Indian economy as a whole
will be significantly more.

So why has the government behaved in this way, only taking the interests of steel
producers into account? As Donald J Boudreaux writes in The Essential Hayek:
The fact that each persons livelihood is tied disproportionately to what he or she
produces rather than what he or she consumes creates a practical problem. Each
person, as a producer, works only at one or two occupations; each person earns an
income only from one or two sources. Yet each person, as a consumer, buys thousands
of different items. 13

And this leads to problems. A Boudreaux writes: A change in the price of any one
or a few consumer goods has much less impact on the well-being of an individual than
does a change in the price of what that individual is paid for what he produces or for
the labour services he sells. As a consumer Id obviously prefer that the price of my
favourite hamburgers or music downloads not rise by 20 percent, but such price hikes
wont harm me very much. In contrast, as a producer Id suffer substantially if my
income fell by 20 percent. 14
12
Press Trust of India, MIP on steel to impact engineering exports: EEPC, February 6, 2016
13
D.J. Boudreaux, The Essential Hayek, Fraser Institute, 2015
14
Ibid

14 | Indias Big Government and How It is Hurting You

 This explains why producers complain bitterly when the price of the product
they produce falls. It also explains why producers lobby and have public relation
agencies, to drive the opinion in their favour.

The consumers on the other hand are not as well organised as producers are.
Hence, they are unlikely to complain. As Bordeaux writes: Politicians in democratic
countries naturally respond to these concerns [of the producers i.e.]. Peoples intense
focus on their interests as producers, and their relative inattention to their interests as
consumers, leads them to press for government policies that promote and protect their
interest as producers. 15

And this is precisely how things have happened in India and continue to happen
under Narendra Modi government. The irony is that Modi had promised minimum
government. Along similar lines the government manipulates the prices of rice,
wheat and sugarcane, by meddling in these markets. By doing this, it has ensured
that farmers produce excess of these crops. The rapid depletion of water tables in
parts of the country is also because of this reason.

Skewed incentives and government meddling have ensured that farmers grow
sugarcane in Maharashtra and rice in Punjab. Both these crops require a lot of
water, which these states do not really have.

What the government should do

The trouble is that the governments cannot do everything. Minimum government

isnt just about limiting the amount of money governments spend on non-viable
things, given that there is only so much money going around.
It is also about trying to limit to the number of things that the government tries
to achieve and concentrate on the most important things which are likely to make
a huge difference.

As veteran journalist TN Ninan writes in The Turn of the TortoiseThe Challenge

and Promise of Indias Future: Governments have tried to do great many things,
from running watch and scooter factories to making shoesall unsuccessfully. They
continue to try and run airlines, telecom companies, hotels and banksall of which

15
Boudreaux 2015

Indias Big Government and How It is Hurting You | 15

have found it difficult to compete with private competitors, losing ground to the latter
when they come on the scene. 16

In this process the more important things get ignored. As Ninan writes: There is
too little of government attention paid to core areas like law and order, education and
healthtoo few judges, too few teachers who teach, too few hospital beds; also too
few trade negotiators and too few policemen, especially those with proper training. It
should be obvious that there are many things that the state does inadequately or badly,
and many tasks that the state has needlessly taken on itself. 17

Lets take the issue of too few judges. Data compiled by the ministry of law and
justice suggests that of the approved strength of 1,056 judges in 24 high courts
across the country, there are 427 vacancies.

A newsreport in The Times of India quotes a study to state that a judge in a high
court spends less than five minutes, on an average, hearing a case, it says. 18

In fact, as per the 2011 census, there were just 16.8 judges per 10 lakh of
population. This was for judges across all levels. Interestingly, the Supreme Court
in a judgement on March 21, 2002, had said that there should be at least 50 judges
per every 10 lakh Indians. 19

Nothing concrete has been done on this front. India needs more judges to swiftly
discard the millions of cases that have been pending across courts. A good judicial
system is also necessary for the improvement in the ease of doing business.

In the Ease of Business rankings put out by the World Bank India stood 178th when
it came to enforcing contracts. And these rankings just took Delhi and Mumbai into
account. In Mumbai it takes 1420 days on an average to enforce a contract. In South
Asia this number stood at 1076.9 days. For the developed OECD countries, the
number was at 538 days.

Unless this number is improved on, the chances of more and more people setting
up businesses in India remain low. Another important area, where the government
16
T.N.Ninan, The Turn of the Tortoise, (New Delhi: Penguin Books India, 2015)
17
Ibid
18
The Times of India, High Court judges get just 5-6 minutes to decide cases, says study, April 7, 2016
19
Ibid

16 | Indias Big Government and How It is Hurting You

doesnt seem to be putting enough attention is primary education.

While IITs, IIMs and AIIMS are being set up all across the India. Is enough being
done to improve the state of primary education in the country?

In fact, our focus on higher education at the cost of primary education is a hang
up from the days when Jawahar Lal Nehru was the prime minister of the country. As
Sanjeev Sanyal writes in The Indian RenaissanceIndias Rise After a Thousand Years
of Decline: Rather than invest in the general primary education, the country used up
all its education budget to provide specialized personnel for grandiose public-sector-
projectsThe needs of the Mahalonobis modelmeant that the country had invested
heavily in tertiary education and built up a handful of world-class institutions. 20

An impact of this, as Sanyal writes was that the bulk of the countrys workforce
was effectively not employable in anything other than subsistence agriculture. 21 And
this is something which hasnt really changed. Currently around half of countrys
population is dependent on agriculture but contributes only around 18% of the
gross domestic product (GDP).

This means there are many more people working in agriculture than there should
be. If India needs to get its millions out of poverty, it is critical that other earning
opportunities are created for these individuals. In fact, only 17% of the people who
work on farms survive only on money they make from their farm. Everyone else
does some extra work.

Hence, its a no-brainer to suggest that people need to be moved out from
agriculture into other higher paying areas like industry and services. As Ninan
writes: Both productivity and incomes will go up substantially if more people can
be moved from low-paying agriculture to higher-paying industry and servicesa key
transition the country has barely begun. 22

The Make in India initiative of the Narendra Modi government should be seen in
light of this. The programme envisages an increase in the share of manufacturing

20
S.Sanyal, The Indian Renaissance: India's Rise After a Thousand Years of Decline
(Gurgaon: Penguin Books, 2008)
21
Ibid
22
Ninan 2015

Indias Big Government and How It is Hurting You | 17

in the countrys Gross Domestic Product from 16% to 25% by 2022 and to create 100
million additional jobs by 2022 in manufacturing sector.

One reason why this target at best remains a pipedream is because of the lack
of education among Indians. The rate of literacy as per the 2011 Census stood at
74.04%.

The trouble with this literacy number is that it does not give you the whole
picture. As per the Human Development Report 2014, the average Indian male has
around 5.6 years of schooling and an average Indian female has around 3.2 years
of schooling. Both Bangladesh and Pakistan are ahead of us. For Bangladesh, the
numbers being 5.6 years and 4.6 years, respectively. For Pakistan, the numbers
stand at 6.1 years and 3.3 years, respectively.

And this is where the plan to move people from agriculture to industry or services
for that matter, starts to go haywire. As Ninan writes: Acquiring job-related skills
without the benefit of a basic education is a challengeit is hard to be a fitter or an
electrician at a construction site if you dont know basic arithmetic and cant read
simple instructions on a product pack. 23

What this means is that the Make in India plan cannot take-off beyond a point
unless our primary education system starts to improve. Individuals need to spend
more time in school receiving better quality education. As things stand currently
not much is being learnt in schools.

In fact, surveys have pointed out that most children cannot read basic text. The
Annual Status of Education Report facilitated by Pratham points out that only
48.1% of children enrolled in Class V could read standard II level text. This means
more than half of children enrolled in standard V cannot read standard II level
text. In fact, more than one-fourth of children enrolled in standard VIII could not
read standard II level text. The report further points out: The gap in reading levels
between children enrolled in government schools and private schools seems to be
growing over time.

Further, it needs to be mentioned here that moving people out of agriculture

into other areas is a very slow process. But nonetheless a start needs to be made.

23
Ibid

18 | Indias Big Government and How It is Hurting You

The point being that the transition is going to be slow. So what is the way out?
Ninan suggests that one way out is to increase productivity of Indian agriculture.
Paddy output per hectare [in India] at about 3.7 tonnes, is 20 per cent short of the
global average and barely half of Chinas. One reason is that Indian farmers are not
using the latest strains of high-yield varieties (growing them is also more employment-
intensive) or adopting new methods of cultivation that require less water. Its the same
with maize, writes Ninan. 24

If these numbers were increased Indias agricultural output would go up in the

days to come, and so would the income of people dependent on agriculture for their
living.

The problem here is that the size of farms over the decades has grown smaller.
As Mihir Sharma writes in RestartThe Last Chance for the Indian Economy:
Indian farms are tiny. Over 80 per cent of them are smaller than 2 hectares...And
they are getting even smaller. They are just over half as big today, on average, as
they were in 1970. Everywhere else in the world, farms have gotten bigger in the
same periodMany people have been convinced that if there was just some way to
increase agricultures share of output, some way in which all of agriculture received
support, things would be better. 25

Demographic Dividend?

The issues highlighted in the last section need to be tackled, if India needs to cash
in on its so called demographic dividend.

The demographic dividend of a country essentially is a period of two to three

decades when the birth rates go down and this leads to a situation where the
workforce of the country is growing at a faster rate in comparison to its population.

Sanyal explains this in his book where he defines three stages: In the first stage,
there is an increase in the proportion of the young in the population as birth rates stay
high but infant mortality declines. 26

24
Ibid
25
M. Sharma, RestartThe Last Chance for Indian Economy (New Delhi: Random House India, 2015).
26
Sanyal 2008

Indias Big Government and How It is Hurting You | 19

 In the second stage, the birth rates come down and the number of old people
in the population increases at a modest pace. In this stage, the workforce of the
country increases dramatically. This is the demographic dividend. In the third and
final stage, the working population falls and the number of old people goes up.

India is currently in the second stage. As Sanyal writes: The UNs projections
suggest that Indias working age population will rise from 691 million in 2005 to 829
million in 2015 and 942 million in 2025 before stabilizing at around 1050 million in the
late 2030sBy this time, India will have the single largest pool of workers in the world,
by passing an aging China. This means that we have entered a phase where the labour
supply will be growing at a very rapid pace for a prolonged period of time. 27

Around 13 million people are entering the workforce each year. And thats set to
continue until 2030. What this means is that India needs to create jobs and that too
at a very rapid rate for the huge number of people that is entering the workforce
every year. And that does not seem to be happening.

Data recently released by the Labour Bureau suggests that no new jobs were
created across eight labour intensive sectors between October and December 2015.
There was a decline of 20,000 jobs. This was the countrys worst performance on
the job front since 2009.

Further, as the Economic Survey of 2014-2015 points out: The power of growth
to lift all boats will depend critically on its employment creation potential. The data
on longer-term employment trends are difficult to interpret because of the bewildering
multiplicity of data sources, methodology and coverage. One tentative conclusion is
that there has probably been a decline in long run employment growth in the 2000s
relative to the 1990s and probably also a decline in the employment elasticity of
growth: that is, a given amount of growth leads to fewer jobs created than in the past.
Given the fact that labour force growth (roughly 2.2-2.3 percent) exceeds employment
growth (roughly about 1 percent), the challenge of creating opportunities will remain
significant.

If this trend continues in the years to come, the demographic dividend can
easily turn into a demographic nightmare. And this remains the biggest risk to

27
Sanyal 2008

20 | Indias Big Government and How It is Hurting You

the India growth story. In the recent past, there have been protests from various
communities across the country, demanding reservation in government jobs. This
seems to suggest that the so called demographic dividend may have already started
to unravel.

To conclude, it is safe to say that these are the issues that the government needs
to concentrate on, if it wants India to progress. Instead it is busy meddling in
various markets and propping up loss making firms, and battling a whole host of
unimportant issues brought to the fore by its ministers and leaders.

It also needs to remember what Thomas Jefferson, one of the founding fathers of
United States of America, and its third president, once said: [The] government that
governs best is the one that governs least.

But then it is worth asking whether this government, or for that matter any
government, is really looking to improve the condition of the people that it governs.
As Bonner puts it: The idea that governments mission is to make things better is
false. Government is best understood as a naturally occurring struggle between the
outsiders and the insiders. By definition, insiders always control the government and
use it to 1) maintain existing power, status and wealth relationships and 2) exploit the
outsiders. 28

As Bonner further writes: But the genius of modern representative government is

that it cons the masses into believing that they are insiders to. They are encouraged to
vote and to believe that their vote really matters. 29

However, cynical it might sound, the situation in India is no different from the
way Bonner puts it, and I dont see that changing any time soon.

28
Bonner 2014
29
Bonner 2014

Indias Big Government and How It is Hurting You | 21

 Equitymaster Agora Research Private Limited
All rights reserved. Any act of copying, reproducing or distributing this Report whether wholly or
in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be
deemed to be copyright infringement.
Disclaimer:
Equitymaster Agora Research Private Ltd (Equitymaster) is the owner of the copyright in this Report
(Hereinafter referred as Report.) The readers are requested to note that this Report is only meant
for personal use of the Readers of Equitymaster. This Report is for information purposes and is not
providing any professional/investment advice through it and Equitymaster disclaims warranty of
any kind, whether express or implied, as to any matter/content contained in this Report, including
without limitation the implied warranties of merchantability and fitness for a particular purpose.
All content and information is provided on an 'As Is' basis by Equitymaster. This is not an offer
to sell or solicitation to buy any securities and Equitymaster, or its associates will not be liable for
any losses or costs incurred or investment(s) made or decisions taken/or not taken based on the
information provided herein.. As a condition to accessing the Report content, you agree to our
Terms and Conditions of Use, available here.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant,
Nariman Point, Mumbai - 400 021. India.
Telephone: 91-22-6143 4055. Fax: 91-22-2202 8550. Email:info@equitymaster.com.
Website:www.equitymaster.com. CIN:U74999MH2007PTC175407

Indias Big Government and How It is Hurting You | 22