Debt to GDP ratio and Economic Growth

02/10/2010

There have been some studies and conclusions therefrom about Debt to GDP ratio of a country and the econonomic growth rate. Some of the conclusions are:

1.once the debt to gdp ratio exceeds 77%, the growth rate will fall

2.for every 10 percentage points fall in debt to gdp ratio, growth rate will go up by 1.4%

These conclusions do not hold good in all situations and for all countries. Further fall or growth in growth rate depends also on the type or purpose for which the debt is incurred.
Generally,

i.if the debt is maily for purposes of undertaking short gestation project like dams, irrigation canals, linking rivers with one another and with lakes etc. the growth rate will go up even if the debt to gdp ratio exceeds 100% or even 150%.

ii.if the debt is incurred for productive purposes like generation and distribution of electricity, import of technology, capital goods, raw materials etc. there will be no fall in growth rate even if the debt to gdp ratio is very high

iii. if the debt is incurred for unproductive purposes like increase in wages without increase in productivity, welfare measures, sports, entertainment etc. growth rate may fall with increase in debt, though in some cases, increase in spending power of the people may lead to increase in demand and consequently production.

iv. irrespecive of the debt-gdp ratio, economy would witness growth, if all able-bodied persons work and they put in their maximum possible ability, time, energy, attention etc to the work

v. the amount required for servicing the debt depends not only on the quantum of debt but also on interest rate. If the interest rate is low or nil, and the repayment period is long, serving debt may not be a big problem.


Bharat Bandh uncalled for

05/07/2010

Increase in diesel, petrol, cooking gas prices should lead only to a marginal or negligible increase in overall prices as:

a) The price of diesel was increased by Rs.2 per litre i.e. by around 6%. The cost of diesel in the truck freight charges is only about 40-50%, the balance being the cost of driver, cleaner, depreciation and profit margin. Thus the freight charges should increase only by about 2.4% – 3%.

 b)transport charges in the retail cost of any product is only 5- 10%, the major components being cost of raw materials, interest rates, depreciation, profit margin, wages & salaries, tax, advertisement charges etc. Thus the fuel price increase should lead to general price rise of just 0.12 to 0.30% i.e. if the retail price of a product was Rs.100, it should cost now only Rs.100.12- Rs.100.30 i.e just 12 -30 paise more, which is definitely negligible.

c)In the case of  auto rickshaws, one litre of petrol gives about 25 kilometers for which the charges are around Rs.150. After price increase it could go up to only Rs.152 or just 1.67%.

 d)in the case of private use of motorcycles, assuming an average consumption of 10 litres (traveling about 800 to 1000 km) per month by a person with an income of Rs.20000 per month, his expenses on petrol will go up by just Rs.35 only i.e less than 0.2% of his income which again is negligible.

 e) cooking gas price has gone up by 10% but average consumption in a  family per month is just 1 cylinder or increase in expenses is only Rs.35 or less than 0.2% of the monthly income.

 f) overall additional expenses for a middle class family shall not be even 1% and this every one can easily absorb

 g) the interest rates had drastically come down recently(by about 4 percentage points) as a measure of reversing the economic slow down. Truck owners, auto rickshaw owners, and manufacturers who usually get finance from banks save a substantial amount on this account. They can easily afford to absorb the additional expenses due to fuel price increase, in stead of passing on the same to the customer. Even if they pass on the additional cost to consumer, consumer’s burden is negligible.

 h) the common man, who works under employment guarantee scheme got an increase of 25% in wages, from Rs.80 to Rs.100 three months ago. So he should not have any problem in meeting less than 1% increase in cost of living.

 i)the increase in salaries of central and several state government and public sector undertaking employees on account of 6th  Pay Commission as also income tax liberalization will enable employees to bear the additional expenses without any difficulty.

 In view of the above, it appears that Bharat Bandh is uncalled for. At the same time the government should restrain truck owners from increasing their charges/prices on the pretext of fuel price increase, beyond 3%, auto rickshaw owners and taxi owners beyond 2%, and manufacturers beyond 1%.


Indian Railways

28/02/2010

It is said that for the last 7 to 8 years, railway passenger fares have not increased. This is not necessarily efficiency. This is not an achievement to be proud of. In the last 7 to 8 years, prices of inputs, steel, raw materials, consumable stores, diesel & other fuels and wages have gone up, some by 100%.  The passenger fares should also have gone up. By not raising the fares, the Railways has forgone a huge amount with the result that developmental works could not be undertaken as much as possible.

The Railway Minister has repeatedly mentioned in her speech that due to financial constraints several works could not be undertaken. Had the fares been increased even by just 10%, (there is justification to increase by higher percentage), Railways could have earned nearly Rs.10,000 crores (Rs.100 billion) more in the last 7 years, which would have enable it to undertake expansion projects. There is need to install escalators, to cross the lines and this could have been undertaken with the additional revenues.

The train fare in 1970 from Chennai to New Delhi used to be around Rs.60 and it has now gone up to around Rs.600, i.e. 10 times in 40 years. During the same period, per capita income in India has gone up by more than 100 times.

Government of India has invested a huge amount in Railways. If revalued, the value of Railways assets – land, buildings, machinery, rails, rolling stock, consumables etc. would be a minimum Rs.1,000,000 crores. Government’s investment in the Railways would be even more than this as for several years, Railways have been incurring loss. At 10% of the investment, Railways should pay dividend of more than Rs.100,000 crores to the Government but it pays only around Rs.66,00 crores. Even after more than 150 years, it is seeking budgetary support from General Revenues. These do not show efficiency.

Thus there is no reason for the Railways for not increasing the fares.