Eco Basics: Understanding Fiscal Deficit

 

Today's article focuses on Fiscal Deficit.

What types of receipts are non-debt creating?

Revenue Receipts, Recoveries of Loans, and Other Receipts are all non-debt creating. This means that the government does not have to borrow to generate these sources of income.

Now, look at the accompanying table: Fiscal Deficit is numbered 22, Revenue Receipts is 1, Recoveries of Loans is 5 and Other Receipts is numbered 6.

Hence,

(22) Fiscal Deficit = (16) Total Expenditure – [(1) Revenue receipts + (5) Recoveries of loans + (6) Other Receipts]

Revenue Receipts would include both tax and non-tax revenue of the Government of India (GoI).

What is tax revenue? 

This refers to revenue that the GoI gets by way of collecting taxes, like Personal Income Tax, Corporate Tax (charged on incomes of companies), Central Sales Tax and Service Tax.

What is Non-tax revenue? 

This would include Stamp Duty and Dividends earned from Public Sector Units (PSUs). Dividend is the return on capital invested by the government in PSUs.

Sometimes the Government of India receives money that it would have lent to some country/organization in the past. When such money is received, it is recorded under the ‘Recoveries of Loans’ head.

When does Fiscal Deficit arise?

Fiscal Deficit arises when the government has expenditure higher than the revenue it generates. To bridge this expenditure-revenue deficit, the government resorts to borrowing. This borrowing is called Fiscal Deficit.

In short, fiscal Deficit is the total borrowing of the Government of India to fund the allocations and expenditures listed in the Union Budget.

In the table above, the Budget Estimate for Fiscal Deficit for 2020-21 (total borrowing) was projected at Rs7,96,337 crore. But the economic ravage brought about by the Covid pandemic destroyed major sources of tax and non-tax revenues. 

The shortfall in Gross Tax Revenue (includes GST, Income Tax, Corporation Tax and other taxes) was Rs5,22,740 crore. The projected figure for Gross Tax Revenue in 2020-21 was Rs24,23,020 crore, but the Central Government could collect only Rs19,00,280 crore. 

So, the Revised Estimates for 2020–21 show a Fiscal Deficit of Rs18,48,655 crore. In other words, what this figure means is that the Government of India is borrowing this huge amount of money in 2020-21! Yes, you got it right: a total borrowing of mind-numbing Rs18.48 lakh crore in one year!

Fiscal Deficit is usually expressed in terms of percentage of the country’s Gross Domestic Product (GDP).

Now, go to the bottom of the table. It is mentioned that India’s GDP in 2020-21 will be Rs194,81,975 crore (Rs194.8 lakh crore).

Taking India’s GDP to be Rs194,81,975 crore in 2020-21, the Fiscal Deficit of Rs18,48,655 crore works out to 9.5% of GDP.

So, to say that we are living way beyond our means would be an understatement. However, given the Covid pandemic-induced shutdown there was little elbow room for the Central Government to raise revenue and hence, it had to resort to very heavy borrowings to fund its welfare schemes. like providing free food grains and direct cash transfer to millions of heavily impacted vulnerable sections of the society. 

In the next post, I will write on how a high Fiscal Deficit could spell doom for the economic growth of the country. 

Eco Basics: What is the Economic Survey?

In India, there is hardly any economic event that captures popular imagination as much as the Union Budget. In this Budget series, The Explainer will focus on the complex budget jargon that puts off even 'interested-in-budget' souls.

What is a Fiscal Year?

Any twelve-month period that is used for submission of accounts, taxation purposes and to state financial reporting by private and public sector companies is called a Fiscal Year.

In India, the Government has laid down the provision that the 12–month starting on April 1 and ending on March 31 of next year will be treated as a Fiscal Year.

To put it in perspective, this article is being written on 31 January 2021, i.e., in Financial Year 2020–21 (FY21). This is also called Fiscal Year ’21.

In the same way, the financial year for 2021–22 will start on 1 April 2021 and will end on 31 March 2022. So on 1 April 2021, we will enter Fiscal Year ’22. 

What is the Economic Survey?

The Finance Minister's Budget Speech contains two major components: Part A and Part B.

Part A of the Speech contains the Economic Survey while Part B comprises the Union Budget Speech.

The Economic Survey is an assessment of the performance of the Indian economy in the financial year going by. For example, the Economic Survey 2020–21 presents an assessment of the performance of the Indian economy in that financial year (i.e., 2020–21). 

The Economic Survey 2020–21 was tabled on 29 January 2020. You can access it here.

What is the Budget?

The Union Budget is a statement of revenues and expenditures for the coming financial year, i.e., the one that starts on April 1 of this year.

Why is the Union Budget presented in February?

The Finance Minister of India presented the annual Union Budget for 2021–22 in the Parliament of India on February 1. It is typically presented in February (and not in March) for the following reasons: 

(a) After its presentation, the Budget is tabled in the Parliament so that MPs can, over the next few days, discuss and debate the various provisions listed in the Budget. 

(b) After the parliamentary debate, any amendment to the original provision (like increasing or decreasing the allocation for a said ministry/program and rolling back any budget proposal) will have to be tabled, discussed, passed, and brought into law by the Parliament. 

(c) Also, the administrative system, especially in case of tax administration, would need to be geared up to reflect any change in the financial, taxation or any other system.

I hope this is good! Please leave feedback in the comments section.

Indian Economy's Vital Stats Infographic

 

Here's a snapshot of the Indian Economy's Vital Statistics.

The MbS Phenomenon

 

In this Explainer, I will focus on the ambitious Mohammed Bin Salman, the Crown Prince of Saudi Arabia. MbS, as he is usually referred to, has, in a very short time, come to dominate the tangled political landscape of West Asia (I prefer this term to the usual Middle East).

An aside on the name: In Saudi society (and generally in the Arabian Peninsula), a man’s name includes the name of his father (pretty much like in large parts of India). Bin means ‘son of’; so, Mohammed bin Salman means son of Salman.

Also, in this article you would find ‘Mohammed’ spelt in two different ways; I have taken the Saudi government accepted spellings of the names of the leaders.  

Who is Mohammed bin Salman?

Mohammed bin Salman is the Crown Prince of the Kingdom of Saudi Arabia. As the Crown Prince, he is next in line to succeed his father and King, Salman bin Abdulaziz Al Saud. (Understanding the name of the King: Salman, son of Abdulaziz; Al Saud is the name of the ruling house/dynasty.)

Virtually unknown in the corridors of power before his meteoric rise, MbS was appointed the Crown Prince in June 2017. Soon after his father became the King, MbS was appointed the Deputy Crown Prince; his cousin and the son of King Salman’s brother Mohammad bin Nayef, was forcibly relieved of his office by MbS.  

Today he is also the kingdom’s Deputy Prime Minister, Minister of Defence, Chairman of the Council for Economic and Development Affairs, and Chairman of the Council of Political and Security Affairs.

MbS is the most powerful person in today’s Saudi Arabia. The King, his father, trusts him blindly and has stood by him even as the calls for the Crown Prince’s removal for his involvement in the botched Yemen War and the Jamal Khashoggi murder saga grow louder.

MbS is seen as an ardent reformer by his supporters, while his detractors describe him as megalomaniacal and impetuous. His supporters point to the several reforms he has ushered in the deeply conservative country: lifting the ban on women drivers, allowing cinemas and music concerts, and introducing a spate of economic reforms.

MbS’ detractors, and there are many, cite his campaign in Yemen and the ill-planned embargo against Qatar as examples of his whimsical behaviour.

They also describe him as power-hungry who cannot tolerate dissent; the jailing of thousands of political dissidents, including women activists is a case in point. It is interesting to know here that the women activists were jailed for demanding driving rights for women. Ironically, MbS lifted the ban on women drivers and yet the women activists were jailed for calling for the same reform! Now, you may find this behaviour difficult to decipher. Well, it is easy if you understand the purport of MbS’ game plan: you cannot demand rights and get them; you will get rights ONLY if the King or the Crown Prince decide to give you rights – in other words, so it is the top-down approach that’s at work here.  

Another example is his treatment of the Prime Minister of Lebanon, Saad Hariri. When Hariri arrived in the Kingdom to meet King Salman, he was bundled to an unknown location; there was a complete blackout of the news concerning Hariri, a leader of a sovereign nation. One week later, Hariri was forced to tender his resignation from the prime minister’s post of his country from the soil of a foreign nation.

A Luxury Prison
The incident that shook the ground beneath the feet of elite Saudis took place in November 2017. Around 200 prominent Saudis, including the former Crown Prince Muhammad bin Nayef and Bakr bin Laden, the head of Saudi Binladin Group (a construction giant), were rounded up and detained for several months at the Ritz-Carlton Palace Hotel on the orders of MbS. The entire operation was described as a campaign against corruption and embezzlement; the detained were accused of enriching themselves at the cost of the Saudi State. It is believed that a few of those detained were tortured and forced into giving up their wealth. Bakr bin Laden and his two brothers were forced to transfer their 36 per cent shareholding in Saudi Binladin Group to a state-controlled company, overseen by MbS.    

The Jamal Khashoggi Saga
Jamal Khashoggi was a Saudi Arabian journalist and an insider in the Saudi royal court. He fled to the U.S after running afoul of the current royal administration in Saudi Arabia. A vociferous critic of the Saudi Arabian royal house, especially the Crown Prince Mohammad bin Salman, he was a columnist for the Washington Post newspaper and head of an Arab news channel. MbS had accused Khashoggi of working with the Kingdom’s rivals like Iran and Qatar.

On 2 October 2018, he visited the Saudi Arabian consulate in Istanbul to collect documents pertaining to the dissolution of his marriage to a Saudi Arabian woman; the documents were necessary for him to get married to his Turkish fiancée. He was murdered inside the consulate by Saudi Arabian intelligence officials. Till date, no trace of his body has been found.

The murder of Jamal Khashoggi has since thrown West Asia into turmoil. The Khashoggi saga has embroiled Saudi Arabia and Turkey in a war of words, with the U.S. squeezed between its two important allies. The following are the major players in the Khashoggi saga: Saudi Arabia, Turkey, the United States, Iran, Qatar, and the Muslim Brotherhood.

Erdogan's Wicked Glee
Turkey directly implicated Saudi Arabia of carrying out the murder on its soil, even pointing a finger at MbS for his involvement. Turkish President Recep Tayyip Erdogan claimed the possession of unimpeachable evidence of the involvement of the Saudi Crown Prince, suggesting that the order for the murder “came from the highest authorities in the Saudi administration”.

Why did the Turkish President get so worked up about the murder of a Saudi dissident? The answer to this seemingly distasteful question lies in the ‘great power’ ambitions of the two countries.

We know that Saudi Arabia is the de facto leader of the Muslim World; however, Turkey, under Erdogan, wants to become the centre of the Muslim World, just like the Ottoman empire was before its eventual collapse in 1922. Erdogan, an Islamist, has a grand vision of becoming the voice of the Muslim World, and he has made no effort to conceal his ambitions.

Erdogan is a firm supporter of the Muslim Brotherhood, an Egyptian extremist Islamist organization with a wide support base in the Muslim World. The Muslim Brotherhood is an anti-monarchy, pro-Sharia group. The Muslim Brotherhood came to power after its newly floated political party won the Egyptian elections in 2012, a development that rang loud alarm bells in the capitals of the monarchies in the Muslim World.

The anti-monarchy, pro-Sharia core ideology of the Muslim Brotherhood raised the hackles of the Saudi monarchy who felt threatened by the hardcore Islamist who was now the president of Egypt, a neighbouring country. Alarmed by the spectre of the spread of the Muslim Brotherhood’s ideology in Saudi Arabia, the Saudi Arabia royal house instigated the Egyptian army to oust the Muslim Brotherhood from power and take over the country. Thus, in July 2013, barely a few months after coming to power, the Islamist President of Egypt was ousted and jailed on charges of terrorism.

The Saudi Arabian involvement in the ousting of the democratically elected government in Egypt angered Erdogan, a die-hard supporter of the Muslim Brotherhood. The murder of Jamal Khashoggi in Istanbul, Turkey’s largest city, came as a blessing to put the Saudis on the mat. He leaked evidence of the involvement of the Saudi Crown Prince in the Khashoggi murder case in a calibrated manner; in fact, the method was so effective that it has been called “death by a thousand leaks”.

Saudi Arabia botched its response to the Khashoggi murder saga; from firmly denying its involvement to calling it a rogue intelligence operation without concurrence of the royal house, the Saudi Arabian government came across as confused and unprepared for the massive backlash from the international community.

To begin with, the United States called on the Saudi Arabian royal house to come clean on its role in the Jamal Khashoggi murder. Since then, the U.S. has spoken in multiple tongues; this is because the Donald Trump White House stood by MbS, even while the Central Intelligence Agency (CIA), the U.S. premier external spy agency, pointed to the direct involvement of the Crown Prince in the murder of the journalist. It is well known that there is no love lost between Trump and the country’s numerous spy and security agencies.

So, why did the U.S. stand by Mohammed bin Salman? The most important reason for this is Washington’s Iran policy. The U.S. policy in West Asia is centred around Iran; Washington has been categorical in stating that it will do all to stop Iran’s “wave of regional destruction and global campaign of terror”.

An enemy’s enemy is a friend. This truism defines the relationship between the U.S. and the Sunni nations in West Asia. The Sunni Muslim nations, like Saudi Arabia and the United Arab Emirates, deeply distrust Shia Iran, accusing it of fomenting terrorism in their nations. So, to counter Iran, the U.S. needs Saudi Arabia, the region’s most powerful nation and the fulcrum of the Sunni Muslim World. Saudi Arabia, under MbS, is at the forefront of the anti-Iran brigade; the Saudis see Iran as an existential threat. In fact, Saudi Arabia even backs Israel (Saudi Arabia and Israel do not have diplomatic relations, owing to the Palestinian issue) in the latter’s covert and overt operations against Iran, spread across the region, especially in Syria, Iraq, and Lebanon.

What about the U.S.’ professed love for the protection of rights of freedom of expression, right to dissent, and religious freedom? Well, in international politics, respect for democracy, human rights, morality, ideology are matters of convenience; they can be expended at the altar of national interest.

 

GK Topics for Interviews at B-Schools, Banks, & Civil Services

This is my first post in almost a year. From today I will make it a norm to blog. 

This post is for those who are preparing for Interviews at India's leading b-schools. An interview is, usually, a free-ranging conversation. I am sharing my list of important GK areas to have a better crack at b-school interviews. 

International Issues – Politics, Economics, & Social

• U.S.: American elections, politics and policies of Donald Trump, violence at U.S. Capitol, names of members of Joe Biden administration. 

• China: Belt & Road Initiative (BRI), militarization of South China Sea, political & military muscle-flexing, economic problems in China, aging, repression at home (like crushing of dissent - Jack Ma), Coronavirus related issues. 
  
• West Asia: Recognition of Israel by leading Arab powers; nuclear ambitions of Iran; normalization of relations between Saudi Arabia and Qatar; Yemen conflict.

• Korean Peninsula: Political contrasts between North Korea and South Korea; North Korean nuclear & missile games; South Korea K-Pop culture.

• Assorted Issues: Brexit and its impact on the UK, elections in Uganda, Swedish strategy in handling COVID, and Nagorno-Karabakh conflict.
  
  

National Issues – Politics, Economics, & Social

• Indian Economy: GDP growth pangs, problems facing the Indian economy, important facts and figures.

• Farm bills: Highlights and controversial issues.

• Stimulus packages: Highlights and various measures, especially concerning MSMEs.

• COVID: Spread and impact on people, healthcare, governance, and economy (with focus on Mumbai and Kerala models)

• Assorted Issues: West Bengal politics, environmental issues, and infrastructure problems.

This is not an exhaustive list, but I am sure this will provide you with basic preparation issues for interviews at b-schools. 

A Basic Understanding of NRC and the Assam Accord

A month back I wrote an article on the Citizenship Amendment Act. Today's article is on the NRC and the Assam Accord

What is the National Register of Citizens (NRC)
The National Register of Citizens (NRC) has become another political football. The BJP’s decades-old stand on the NRC has remained the same. From the party’s manifesto in the 1996 general election to the 2019 general election, the BJP has remained firm on completing an NRC to curb illegal migration into India, especially in the north-eastern states from Bangladesh.

In the 1996 manifesto, the party articulated three Ds: detection, deletion, and deportation – detection of illegal immigrants, deletion of their names from the electoral rolls, and deportation to the country of their origin.

In the 2019 manifesto, the party declared that: “There has been a huge change in the cultural and linguistic identity of some areas due to illegal immigration, resulting in an adverse impact on local people’s livelihood and employment. We will complete the National Register of Citizens process in these areas on priority. In future we will implement the NRC in a phased manner in other parts of the country. We will continue to undertake effective steps to prevent illegal immigration in the north-eastern states. For this we will further strengthen our border security.”

What is the Assam Accord?

The reader must note that the NRC idea is not the BJP’s baby. The NRC idea, first proposed in 1951, took root in the 1970s when the All Assam Students Union (AASU) launched a mass movement after its scrutiny of the local electoral rolls revealed names of a large number of illegal Bangladeshis. The AASU protested vehemently with its ‘Ds’ demand: detection, deletion, and deportation – detection of illegal immigrants, deletion of their names from the electoral rolls, and deportation to Bangladesh. The protest gained popular traction as it touched a raw nerve of the locals: they had been impacted adversely, especially demographically and economically, by the presence of illegal Bangladeshis.

However, it was only in August 1985 when the Rajiv Gandhi-led Congress Government and the AASU signed the Assam Accord. The central feature of the Assam Accord were the 3 Ds: detection, deletion, and deportation – detection of illegal immigrants, deletion of their names from the electoral rolls, and deportation to Bangladesh.

Under the Assam Accord, the Citizenship Act was amended to include clause 6A that provided for the classification of immigrants in Assam: 

• those who came before 1966 (including Hindu refugees who fled East Pakistan during the 1965 war); 
• those who came between 1966 and 24 March 1971 (when war with Pakistan officially commenced); and 
• those who came after 25 March 1971 (war refugees and later illegal immigrants). 

Citizenship was to be given to all those who migrated before 1966 from east Bengal and east Pakistan. Those who came between 1966 and 1971 were to be disenfranchised and granted citizenship after due process. Those who came after 24 March 1971 were to be detected and deported.

Subsequent governments at both the Centre and in Assam failed to complete the NRC. Fed up with the indifferent attitude of the state government, the AASU knocked on the doors of the Supreme Court, which ruled that the NRC, promised under the Assam Accord, must be completed under its supervision.

Now, it is clear that the NRC in Assam was (i) a provision of the Assam Accord, to which the Congress was a party; (ii) held in the state after the Supreme Court of India called for its implementation and (iii) the central government has had no role in its completion.

The draft NRC in Assam registered 2,89,83,677 out of the state’s 3.3 crore population (census-based). The rest were left out; in other words, they could be classified as ‘illegal immigrants’. It is here that the Bangladesh Government comes in; in case, Bangladesh refuses to acknowledge these four million as its own citizens, they run the risk of being labelled ‘stateless’.

For now, the BJP’s flip-flop has only muddled the NRC debate. Things get murky when the ruling party does not lend clarity on its current stance, especially considering the several misgivings about documentation and proof of citizenship.

Identifying illegal foreigners – whose job is it?
The Central Government is vested with powers to deport a foreign national under section 3(2)(c) of the Foreigners Act, 1946. These powers to identify and deport illegally staying foreign nationals have also been delegated to the State Governments/ Union Territory Administrations and the Bureau of Immigration under the Foreigners Act, 1946. Detection and deportation of such illegal immigrants is a continuous process. Statistical data of cases regarding illegal immigrants is not centrally maintained.

I think the BJP should run a better PR machine with focus on three central aspects of the CAA: (a) that the CAA is an amendment to the existing Citizenship Act, 1955, (b) that it only speeds up the process of granting citizenship to members of certain communities, and (c) that it does not relate to the citizens of India.

Can Iran risk a war against the U.S.?

In this short note, I will focus on two important questions on the fluid situation in West Asia following the killing of Qosem Soleimani, arguably the second most powerful person in Iran and the head of its Quds Force, a special branch of the Iranian Revolutionary Guard Corps (IRGC).

The global media is screaming from the roof-top about an impending World War III. Well, I have a contrarian viewpoint. Here it is.

Can Iran risk a full-fledged war?

No.

Iran cannot risk a full-scale war against the United States.

Its economy is tottering, especially in light of the economic sanctions imposed by the U.S.; here's a short note.

(a) Iran's GDP is likely to contract by 9.5 per cent, i.e., produce a tenth less than the previous year. 

(b) Sanctions, imposed by the U.S. for Iran’s pursuit of nuke weapons, have
dragged the budget revenue down, which has squeezed the money available for welfare schemes;

(c) oil production has fallen by nearly 90 per cent;

(d) exchange value of the currency (Rial) has dropped significantly (one American dollar gets you 1,40,000 rials at the current exchange value); and

(d) the country is rationing petrol at 60 litres per person at 15,000 rials per litre (anything above is sold at 30,000 rials).

It is true that Iran has developed a large arsenal of missiles and other weapons despite being under the burden of debilitating sanctions. Its missiles can reach Israel, an arch-foe. However, Iran may not enjoy a first-strike capability as Israel has the highly effective Iron Dome anti-missile interceptor.

Even if Iran does strike Israel with a missile first, it would have to bear the brunt of a sustained barrage of missile strikes from Israel.

Iran knows that it does not have the military capability to engage in direct confrontation with the U.S.; its conventional decades-old military machine is no match for the world’s most advanced weapons system of the U.S..

Also, almost all of the oil and gas plants of Iran are on its coast in the Gulf. In the event of a full-scale war, it is likely that the U.S. will seek to destroy these strategic assets, which are at the heart of the Iranian economy.

Once destroyed, there is precious little the Iranians can do fuel their war effort; no money will flow from the destroyed energy assets.

What is the most likely way for Iran to respond?

As Iran cannot risk a full-scale direct military confrontation against the U.S. and Israel, it will most likely resort to ‘asymmetric warfare’, an idea pioneered and built by Qosem Soleimani.

In the last two decades or so, Soleimani raised, nurtured, armed, funded and guided several Shia militia groups across Iraq, Syria, and Lebanon. The most popular of these militias is the Lebanon-based Hezbollah.

It is most likely that Iran will attack the U.S. and Israel using these militias as proxies to advance its interests. Considering that most of the militias are disparate groups, it may become greatly difficult for the Americans and the Israelis to defeat them.

In the fast-developing scenario enveloping West Asia, Iran might scream itself hoarse, but it knows that its best bet to hurt its biggest enemies is by using asymmetric warfare through its proxies.