Archive for August, 2012

On orders from High Command

August 30, 2012 Leave a comment

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Chattisgarh Eliminates Farmers’ Suicides for BJP

August 29, 2012 1 comment

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Are Agricultural Commodity Prices Peaking Out? [26-08-12]

August 26, 2012 Leave a comment

Are Agricultural Commodity Prices Peaking Out? [26-08-12]



Reuters CRB Index:



The Reuters/Jeffreies CRB Index all commodities including grains, metal, oil and ores.  As such, agricultural commodities are only a part of the overall commodities market.  Nevertheless, it is helpful to be able to put agricultural commodities in the context of the general commodities market.


The weekly chart above, puts the recent rally in commodity prices in the context of the correction in commodities that began in April 2011 from a level of 370.  The index closed the last week at 307, about 63 points below its 2011 peak or about 17% below the previous peak prices.


Prices in the current rally have moved up from a low of 270 to 307 or approximately 14%.  Has the rally peaked out?  From the chart above, one could surmise that we are very close to the peak and may well be for another leg to the correction that commenced in May 2011.


In short, this is not the time to be chasing commodities with the bulls.


Corn [$CORN]:



While the pattern of price correction in corn more or less matches the pattern in the general commodities index, it not as bearish as the former.  Corn peaked at just under 800 in May 2011 but has made a new high of 809 in the current rally indicating underlying buoyancy in prices.


Corn could correct along with other commodities from current levels.  Corn is over-bought on weekly chart and the next correction could well take it back to $600 or so.  It is time to book profits in corn along with other commodities.


Soybean [$SOYB]:


Soybean illustrates the bullish bias to agricultural commodities in clear contrast to the bearish bias in the general commodity markets.  Soybeans were $1475 in May 2011 but have topped $1731 in the current rally.


Nevertheless, it may be time to take profits off the table in Soybeans as well.  It is highly unlikely that Soybeans alone will defy a market wide correction in the commodity markets.  SOYB could drop 1475 in the ensuing correction.  If so that would be very bullish for the lon-term in the commodity.


Wheat [$WHEAT]:



The weekly wheat chart again illustrates the bullish bias to agricultural commodity prices in contrast to the general commodity prices.  Wheat peaked at $888 in February 2011 and made a new high of $940 in August this year.  While a correction in wheat prices is not ruled out, the correction may be relatively shallow.  Look to take profits in wheat as well.



Sugar [$SUGAR]:



Sugar is in a long-term down trend.  From a level of 0.34 $SUGAR has declined to 0.20 and the bottom doesn’t appear to be in just as yet.


It would be premature to anticipate a bottom in $SUGAR.  But one would expect a bottom to be in by end of the year.



Rough Rice [CBT]:



Rice is one of the major food crops that has been in major down-trend April 2008 and probably hasn’t bottomed out.  From a level of $25 at the peak, the price now stands at $15.5.


The correction in Rice may continue.  Long-term trends indicate a bottom by the year and about $12.







Cotton is the big surprise in the Agricultural commodity markets.  Clearly Cotton has bottomed out at $68 and looks all set for a new long term bull run.


The confirmation of a major tradable bull run will come on Cotton rising above $85 and successfully challenging its 200 DMA which is currently in the $90 region.  The logical target for the rally would be the previous of $225 minimum.


Cotton appears well worth tracking for a bullish play.  Hope Indian farmers take note of the development.

NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.


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MARKET NOTES: Treacherous markets ahead

August 25, 2012 1 comment

MARKET NOTES: Treacherous markets ahead.




The gold rally was late in coming but has finally turned up fairly strong.  Gold pierced through its 200 DMA around 1648 and closed the week at $1669.90.  The question now is [a] is this bullish breakout and [b] where does gold go from here.  The answer depends on your preferred wave count and is likely to be hotly contested in the market whichever way it goes.


The bullish case rests on the assumption that gold has corrected in an orderly A-B-C wave structure from the top of $1920 to the low of $1527 and therefore the correction is complete.  In that case, the sharp breakout atop the 200 DMA is genuinely bullish.  If so, Gold should correct down to $1650 soon, and upon the price holding above the 200 DMA, should signal a new bull rally in gold.  This scenario is quite possible.


The bear case rests on the assumption that the correction down from the top of $1920 is in fact the start of a bear market in gold and therefore the correction should have another leg to it.  In short we are in wave 4 up of the first impulse wave down and the break atop 1648 is merely a bear rally.  I favor this view unless proven otherwise by price action.


Sometimes, as a trader you should let the markets resolve issues without taking sides.  I would wait for the market to retest the 200 DMA before taking a fresh view of the price action.  In passing one may note that most commodities are approaching peak-out points and metals may well join the herd.  In such a case gold may well coast along at the current price without going significantly higher than $1700.





Silver has rallied in sympathy with gold.  It closed the week at $30.78 a touch above its 200 DMA which is the $30 area.  Silver could rally to $32 whereupon it hits the long-term, downward sloping trend-line that has capped previous bear rallies.


Silver has followed a significantly different trajectory in its current correction than gold.  It wave structure is also quite distinct from gold.  The counter-trend rally in Silver could be a jagged sideways movement between $35 & $30 for some weeks.  This also means that later in the correction one could see the down-sloping trend line also violated.


By no means bullish on Silver.  But the metal has signaled a counter-trend rally that could have treacherous swings.  It is best to sell very strong rallies to the upper band of $35 and buy the drops.  Long term shorts should be avoided till the rallies show clear signs of exhaustion.  Note Silver is overbought.




WTI Crude:

WTI crude closed the week at $96.15 a touch below its 200 DMA which it pierced through on 21st August.  A quick retest of the 200 DMA augurs well for continuation in the crude rally.


As per my wave counts, on a successful retest of the 200 DMA from the topside now underway, crude could rally to $100 in the next week before going into a correction.  The probability of overshooting the $100 target is fairly high.




A significant correction in crude prices may have to wait till after the price rallies above $100.  Crude remains a buy on dips.






US Dollar:



The Dollar closed the week at 81.36 after having made a low of 81.22.  In my opinion, the first leg of the price correction in the Dollar from its recent top of 84.30 is over.  In terms of time, the correction still has some way to go.


Note the index’s 200 DMA is positioned at 80.75 while the upward sloping trend-line marking the current rally is well above the 200 DMA.  The Dollar has been supported by the trend line and not the 200 DMA.  Further the Dollar is oversold.


During the ensuing week the Dollar could retest support against the rally’s base trend-line and rally to its first overhead resistance at 82 followed by a higher target at 83.





Euro closed the week at $1.2511 after having made a high of $1.2526.  The current rally in the Euro is marked by very high level of skepticism and has seen very sharp corrections.  Nevertheless, on the charts there is no indication that this rally is over.


In the ensuing week the Euro could rally further to test 1.27 level.  It is the Euro’s reaction to the 1.27 area of prices that will reveal clues to where the Euro wants to go.  While not bearish on the Euro I would not buy the dips.  Currency best avoided until a clear decisive break atop 1.27 or a decisive breakdown from there.





The US Dollar closed the week at 55.49.


The $ has been in a correction ever since hitting the top of 57.30 but this correction has played out in the triangle shown in the chart above.  Three things may be noted in the chart.  Firstly, there is nothing bearish in the charts.  The $ is well above the 200 DMA, its rally base trend-line and more or less on its 50 DMA.  So the long-term trend up remains intact despite the correction.  Secondly, the pennant shaped triangle is usually a trend continuation signal that confirms there is no reversal in basic trend.  Lastly, within the triangle we have an A-B-C-D-E wave pattern, and we may be nearing E as the triangle terminates.  In short we are due for a break out from the triangle very soon; possibly in the ensuing week or the next.


Which way will the $ break out?  The odds are highly in favor of the main trend which is up.  Wait for confirmation before buying the Dollar.  On a break-out first target would be 56 and on confirmation of an upside from there, the previous top of 57.3 beckons.  A break below 55 invalidates the above scenario.


NYSE Composite:



NYSE Composite closed the week at 8048, well below the high of 8167.  Is the rally over?


First note that the previous two highs of the NYSE Composite were 8336, preceded by 8691.  The top made last week at 8167 was lower than both.  So the index remains in long-term bear trend right from the top of 10,367 in August 2007.  We are in a mega-bear market if you go by this composite index which includes all the stocks listed on the NYSE.  That fact should be always kept in mind while looking at the narrower US indices like the DOW or even the S&P500.


Where do we go from here?  Barring a highly unlike flare up again, the first target for the NYA is 7900 followed by a retest of its 200 DMA which is currently in the 7850 region.


Note I expect the long-term trend-line stretching from the March 2009 low to the low of 7265 in May 2012 to be tested and possibly violated before a further rally in the index.


The corresponding downside target for S&P500 then is the 1360 area and it is the market’s response to prices in this area that will set the further trend in US markets.


On the whole expect a very treacherous markets as the price levels could be driven purely by the technical play between bulls & bears as the new trend is established.











Sensex closed the week at 17,783 after having made a high of 17,972 the previous day?  Is the rally over?


The fall on Friday was a clear violation of the rally’s base trend-line stretching from the low of 16,598 on 26th July.  That doesn’t terminate the rally but it does throw up a cautionary flag.


In the weekly chart above, the rally has room till 18,500 in terms of price and a week or two in terms of time to reach for a higher mark.  Whether it will get there or not is difficult to say.  But we are approaching a significant overhead resistance that can terminate the rally.  Structurally, there is nothing bullish about the market in the medium or long-term.  It is best to get out while the going is good.



NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.


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MARKET NOTES: 18.08.2012. Equity markets continue to be toppish

August 19, 2012 Leave a comment

MARKET NOTES:  18.08.2012.  Equity markets continue to be toppish


Gold [$GOLD]: 


The pull-back in gold from the low of $1526 in May this year has been exceptionally weak.  Gold closed the week at $1615.30, well below its 200 DMA which is currently at $1645.  One would have expected gold to at least challenge the 200 DMA and rally to perhaps $1660 region.  But it did not happen, a fact which points to future weakness ahead.

As per my wave counts, the time cycle for a pull-back is exhausted and we could see weakness reassert itself in the gold price going forward.  In the ensuing downturn that could last months, I expect the floor at $1525 to be severely challenged and possibly be breached.  Note that all through the pull-back period the traded volumes in gold have been declining.


WTI Crude:

I have been bullish on WTI crude the past few months and it did not disappoint closing the week at $95.23 after making a high of $96.  Crude has had a long rally from the low of $77 in July this year $96.  It is now showing signs of an impending correction although the shape and size of one remains indeterminate.  In a very strong uptrend such as the one under way in crude, corrections can be perfunctory.


On the charts above, traded volumes have not matched price action, while the price itself is all set to challenge the overhead resistance represented at crude 200 DMA.  The RSI shows crude is overbought.  Taken together, these factors point to an imminent correction in crude price.


US Dollar [$USD]:

The Dollar Index has entered a correction mode from its recent highs at 84.14.  The correction has weeks to run yet and the price action could be fairly choppy.  The first major logical target for this correction remains 81 followed a deeper floor at 80 which also is the Index’s 200 DMA that is unlikely to be breached.

Dollar could spend the ensuing weeks in the 81-83 range.  Trading is best avoided in the ensuing sideways market with limited price range.  However, in the medium and long-term, the Dollar remains bullish and may be bought on dips to its 200 DMA whenever that happens.


Euro$ [FXE]:

The Euro’s correction to the run up to $1.2450 from its recent low of $1.20 has been rather mild and may be over.  The Euro closed the week at $1.2330.

The Euro remains in an uptrend with first major overhead resistance at $1.24.  Note traded volumes in the Euro favor upticks in price while its RSI is in neutral zone.  Its 50 DMA is around 1.23.  In the ensuing week, the Euro could aim to take out the 1.24 resistance and fill the gap in the charts between 1.23 and 1.25.


The above doesn’t mean long-term bullishness in the Euro.  But the upward correction will provide clues to the future shape of the price movements in the currency.  The ultimate target for this uptrend could be 1.27 to 1.28.



After its recent high at 57.30, the Dollar has been correcting but the correction has been unusually mild considering the sheer run up before the top.  That leads one to believe there could be further upsides to the Dollar against the INR after a period of consolidation.

On the charts, the Dollar is ambiguously positioned in the short-term.  The next few trading sessions could resolve the ambiguous picture.  The level on the upside is 56.20.  On a breach of this overhead resistance it would be safe to assume that the correction is over and the uptrend has resumed.


A breach of the floor at 55.40 would indicate some more period of consolidation.  Either way, the Dollar remains a buy on all dips since the uptrend in the Dollar is unlikely to have been exhausted.  Remain bullish in the long-term.


US Equities: 

From time to time, it is good to see the broad market in order to place the movements in narrower Indices in a larger perspective.  This is necessary since authorities periodically remove under-performing stocks from the major indices and replace them with better performing stocks that gives the major indices a bullish bias that may be lacking in the broader market. The NYSE Composite Index is the universe of all stocks listed on NYSE.


In the rally underway, note traded volumes decline even as prices move up.  That’s a dangerous divergence by itself towards the top of a rally.  Note also that the index is now in over-bought territory but not by a margin that indicates an imminent correction.  Lastly, note that the price is now up against on overhead down-sloping trend line through the previous two tops that indicates a major resistance overhead.  Such trend lines are rarely breached except by a small nick for a short time.  All of the above point to an imminent market top.  It could happen in a day or weeks; but we are pretty close to one.


Having looked at NYSE Composite, take a look at the S&P 500.  First, SPX closed at 1418.16 which is pretty close to the previous top at 1423.19.  In a major downtrend like the present one, previous tops are rarely breached.  Second, traded volumes in the blue circle show a disconcerting trend downwards even as the index moved up.  That doesn’t indicate a healthy rally.  Lastly, note the RSI which indicates an overbought market though not dangerously so,


While the price action in the SPX is clearly not as bearish as the one in NYSE composite, the other crucial parameters bear out the bearish bias of the composite index.  In my view the US equity markets will soon run out of steam.  Maintain my earlier view that the US markets are very close to a top.



The Sensex broke atop the downward sloping trend-line connecting previous tops in the current down-trend.  Its 50 day DMA has just crossed above its 200 DMA – a golden cross though folks in Mumbai don’t pay this that much attention.  And the Sensex itself closed at 17,691 atop the downward sloping trend line.  All in all pretty bullish price action, that.

While the rally could extend in time and price to 18,500, I am not sanguine about the sustainability of this rally despite all the breakouts, golden cross-over and the like.  There are many reasons to be skeptical of this rally.  I shall briefly point out a few things to substantiate my point.


The Sensex is a pretty narrow index.  In fact it is just 30 stocks compared to the 500 in the S&P 500 which itself is much narrower than the total markets represented by the NYSE Composite in the US.  And we saw the divergence between SPX and NYA in the note on US equities.  We don’t have a composite index for the BSE or NSE.  So I have used the BSE 500 to study the divergence between the Sensex and the broader market.  Note BSE 500 did not make a new high or even come close to the 2008 top in November 2010.  So the broader Indian market is in a firm, long-term down-trend from 2008 as per the BSE 500.


The BSE 500 wave count is much clearer than on the Sensex and indicates that the present rally is merely a correction to the drop from 8460 to the low of 5655.  We may have a week or more to run with the uptrend and the Sensex could try for 18,500 but the current rally is not the beginning of a new bull markets.  For that more time & price correction is necessary.


Within the Sensex, the financial sector presents which is about 30% of the market-cap, presents divergent trends.  The private banks including institutions such as HDFC are showing strength in the counter-trend rally, while the PSU banks show major weakness across the board.  In both the cases, the correction has lots of time to run.  Remember that the financials in the Indian market peaked in 2010 and not 2008 with the other stocks.


That said, a few major stocks like RIL, HDFC, HDFC Bank are poised at crucial junctures that could indicate the strength left to fuel a further counter-trend rally.   On the other hand, PSU banks should be watched for weakness to assess how far this rally can go.


Apart from HDFC Bank, which continues in a strong uptrend, I would rather spend time accumulating good blue chips that indicate that prices have bottomed out.  This rally is not worth chasing.



NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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PC rediscovers Congress maths

August 16, 2012 Leave a comment

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August 15, 2012 Leave a comment

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Baba Ramdev’s Great Revelation

August 14, 2012 3 comments

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Salvaging the UPA Gravy Train Wreck

August 13, 2012 Leave a comment

Salvaging the UPA Gravy Train Wreck


In our last article, Shaelja and I detailed the veritable explosion of government subsidies between 2004-05, when this UPA government took control, and 2011/12.  The following chart makes that obvious at a glance.


Subsidies in 000s of crores


Between the years 2004-05 and 2011-12, total subsidies grew by a whopping 396% while the GDP increased by a more modest 75%.  When this government assumed charge, subsidies were a modest 1.74% of GDP.  They currently amount to an unsustainable 4.91% of GDP.  Clearly, subsidies have to be cut drastically if bankruptcy on the external and internal debt front is to be avoided.  Is this politically feasible must be the key question agitating the minds of the politicians.  Elections are due in 2014.  Between now and elections, either the ruling party has to put its house in order this year, or postpone reforms to after elections for the next government.  Should reforms be postponed to after elections, it should be obvious the next government will have a huge mess on its hands, with little reserves and no room for maneuver.  Therefore, it is in the interest of all politicians, ruling and opposition who hope to grab power in the next elections, to resolve the mess here and now.   How can it be done?


Contrary to the general impression created by our flawed political discourse, most of the incremental subsidies over the levels prevailing at the end of 2004-05 have gone to the well off middle class, rich and the corporate sector.  Subsidies to the poor grew from R25.4 thousand crores to R90.8 thousand crores and at the end of 2011/12 amounted to no more than 1.74% of GDP.  In contrast, subsidies to the rich and corporate sector grew from R28.89 thousand crores to R165.48 thousand crores amounting to over 3.17% of GDP at the end of 2011/12.  Clearly, it is not welfare program for the poor that have led to the explosion in subsidies.  Instead, it is the unwillingness to raise administered prices of goods like petroleum based fuels and fertilizers that antagonize the middle class that have ballooned the subsidy bill.  Political pusillanimity in the face of the powerful, rather than philanthropy for the poor, is the real malaise that grips this government.


A glance at the composition of subsidies at the end of 2011-12 makes the steps necessary to resolve the mess obvious.


Subsidies in 000s of crores, 2011-12











Only about R4000 crores of the subsidies on petroleum based fuels go to the poor BPL families.  The rest, amounting to R68.44 thousand crores go the middle and upper classes; people with a marginal savings rate of 30% or more.  Surely, this class of people can pay the economic cost of fuels they use much like their counter-parts in poor countries like Bangladesh and Pakistan.  There is absolutely no economic case for subsidizing petroleum based fuels to anybody except the BPL families.


Fertilizer subsidies comprise two parts.  One half is an outright production subsidy to urea manufacturers.  That this subsidy goes to farmers is mere convenient fiction.  With fully depreciated plants, manufacturers have no economic case for continuation of such subsidies.  The other half comprises import subsidies to DAP [Diammonium Phosphate] fertilizers where local production is minimal.  There is global shortage of DAP due to depleting reserves of Phosphates that is never going to go away.  Farmers in any case are given a cost based support price for their produce.  It is far better for government to cutoff subsidies to manufacturers and importers and to instead compensate farmers through higher support prices.  A onetime adjustment in food prices is not inflationary.  In fact it will be deflationary.  Prices will soon settle down and in the long run inflation will come down.


No reform can happen unless it benefits the ruling party.  Such is the utter cussedness of our politicians and political system.  So is there some way that a skilled politician like Sonia Gandhi can be made to see direct self-interest in reforms?  Consider.


Recall that one of the key reasons for UPA’s victory at the last polls was the bank loan write offs given to farmers.  Can something like that be worked out without increasing net subsidy?  It turns out that you can have a strategy to win 2014 polls through reforms although it means hard work and high political risk.  So let us examine this strategy.


The strategy involves the following steps pursued by Sonia Gandhi.  In the ruling party only she has the stature to pull it off successfully and it is in her interest to see this through to completion anyway.


  1. 01.  SG should put the full weight of her political authority, in party and government, to implement the Adhar Scheme in manner that payment of subsidies to farmers and BPL families in, at least a few of the Congress ruled States, becomes feasible well before 2014 elections.  Just cut through the bureaucratic infighting and make the UID based scheme for payment of subsidies directly to beneficiaries in cash happen.  Once the poor and the farmers see actual cash in their bank accounts, all argument will cease.  This is the pay off for Congress in its real support base.
  2. 02.  The subsidies to be paid directly to beneficiaries should include food, fuel, and in the case of farmers, urea based fertilizers.  All subsidies to urea manufacturers should be phased out.  Subsidies to DAP importers can continue till a mechanism is designed to pay farmers directly or the cost of the same is included in minimum support price mechanism for food crops.
  3. 03.  Remove all petroleum based subsidies except 1, or at most 2, cylinders per family.  Make consumer pay full price for the LPG and credit the subsidy for the same directly to their bank account.  Consumers who want the subsidy should be asked to fill out a form based on their voter’s card or UID when available to claim the subsidy.  Likewise, self-employed transport operators who oppose reduction in diesel subsidies, should be offered a fixed subsidy in cash for a certain amount of diesel payable into their bank account.  For the rest everybody should pay the economic price of all fuels.

Note, if the government can knock off R68 thousand crores of fuel subsidies and about R25 thousand crores of fertilizer subsidies, the total subsidy bill comes down to R163 thousand crores which is about 3.1% of 2011/12 GDP.


Should SG be able to push through the UID scheme and have it implemented in a few Congress ruled states, something entirely feasible given the time frame, she has a good chance of not only eliminating fuel subsidies but also implementing her pet Food Security Bill that she hopes will fetch her more votes.


SG will have realized by now that her NAC based agenda, right or wrong, was defeated by simply crowding out the poor by the middle class and the rich snouts at the subsidy trough.  She can push back vigorously using the UID as a tool to focus sharply on the poor and eliminate needless subsidies to the well off. Direct cash payments will empower and enthuse the poor like nothing else.  So the Congress gets a rich harvest of votes.  And the total subsidy bill will have come down from close to 5% of GDP at present to something like 3% of GDP which will give our economy some breathing space to reform and restructure for more sustainable growth.  UID, and elimination of petroleum subsidies, is her key to the next election.


Pertinent to note that in case SG and the Congress do not pick up the courage to take the above steps now, the government that takes over in 2014, will have little option but to take these steps anyway.  In other words, for us voters the real choice is between the government doing it now or after elections in 2014.  The earlier the better.  Subsidies are a cancer gnawing away at the vitals of our economy.


Growth in subsidies under UPA



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The UPA Gravy Train Wreck

August 13, 2012 Leave a comment

The UPA Gravy Train Wreck


Between the years 2004-05, when the UPA took charge at the Center, and 2011-12, a span of 7 years, out of every incremental Rupee generated by the country as GDP, 9 paisa, or a little over 9%, has been given away as subsidy by this government.  No, this is not a poor joke.  A full 9%, if not more, of all incremental output over the last 7 years, is now being disbursed as subsidies to some lobby group or the other.  How can any country survive such profligacy and for how long?


But first let us consider the numbers themselves which are given in the attached spreadsheet.  Between 2004-05 and 2011-12, the GDP grew by a little over 75%.  The growth rate during the period, a shade under 9% in real terms, was truly respectable.  However, in the same period, subsidies to various groups, detailed in the attached sheet, grew by a little under 396%. Yes 396% against the growth in GDP of just 75%!  At the end of 2004-05, total subsidies as a %age of GDP stood at 1.74% a respectably “safe & sustainable” level that the UPA government inherited from NDA.  By 2011-12, subsidies had shot up to 4.9% of GDP.  Note India went bankrupt in 1990 when subsidies reached almost 3.5% of GDP.  We are already at nearly 5% of GDP.


The above figures do not include hard-to-calculate cross-subsidies such as those given to farmers on power, under recoveries of service charges in Government services and mispricing of such resources as water to households and farmers.  If these are taken into account, the subsidies would be much larger than the figures given here.  The enormous distortion in general prices by such a high level of subsidies is simply mind boggling.


As noted earlier, the UPA government inherited a fairly low and sustainable level of gross subsidies and fiscal deficit from its predecessor NDA government.  The mess that we are in is therefore entirely due to the utterly irresponsible way in which the UPA has cravenly caved in to demands for handouts from various pressure groups.  What is astounding is that almost 10% of all incremental output from the economy over the last 7 years is being doled out as a handout to some claimant or the other. Why has the UPA government been so supine to pressure groups given that it is the one that claims to be for reforming the economy and cutting out subsidies?  What went wrong?


Before you can answer that question let us take a look at what these subsidies are and whom do these subsidies go to.

As at the end of 2004-05, subsidies totaled R51,614 crores and were  1.74% of GDP made up of the following items.


By the end of year 2011-12, subsidies had grown by a whopping 396% from R51,614 crores to R256,296 Crores.  As a percentage of GDP, subsidies grew from 1.74% of GDP to 4.91% of GDP.  They were made up of the following items.


Note the change in composition carefully.  Petroleum subsidies which were negligible at the end of 2004-05 grew to 27% of total subsidies in 2011-12.  While food subsidies, which were 47.50% of the total subsidies in 2004-05, shrank, yes decreased, to just 28.4% of total subsidies in 2011-12.  In terms of composition of subsidies, the supposedly pro-poor UPA government has been shrinking food subsidies to the poor and substituting them with subsidies on fuel for the middle and upper middle classes!


Note just about R3500 crores is spent on fuel subsidies to below the poverty line families, and over the years, this figure is shrinking.  Most of the petroleum subsidy, now totaling R68,481 crores goes to the middle & upper classes including diesel subsidy to transport operators who by no means can be classified as poor.  Likewise, much of the fertilizer subsidy goes to the corporate sector, be it as production subsidy to urea manufacturers or to DAP importers.  If the subsidy were really intended for farmers, this can and should go directly to farmers but by design it doesn’t reach there.  For this analysis, we have assumed about 65% of the food subsidy goes to the actual poor rather than leaking to the middle class.  Note, of all the subsidies, only employment assurance does not “leak” if implemented honestly.  Government pretends it isn’t subsidy in the first place.  But the effort hardly creates any assets and leak it does albeit through corruption.  But we have assumed all of it does go to the poor.


On the above basis, as at the end of 2004-05, the subsidies were split as under among the poor and the rich, including the corporate sector.  Note subsidies to the corporate sector eventually end up as dividends to shareholders who aren’t poor.


Note, a little less than half the subsidy as at the end of 2004-05 did reach the poor.  Below is the data pertaining to 2011-12; UPA’s gorgeous pro-poor record in its entire splendor.


Lo and behold the UPA magic.  The share of the poor, in whose name all subsidy is created by liberal bleeding hearts, has shrunk from a little under half to just about a third.  Mind, total subsidy during the period grew by 396% and the share of the poor shrank from half to one-third!  What of the well off?  As usual they had smuggled themselves into the subsidy trough under the guise of the ubiquitous “common man” to grab over two-thirds of all subsidy after it had nearly quadrupled from the level prevailing in 2004-05.  Yet this very class of people is on twitter screaming itself hoarse about inordinate increase in food subsidies for the poor or the inequity of MNREGA.  Hypocrisy thy name is our vocal middle class.


Sonia Gandhi, and her Marxist kitchen cabinet at the National Advisory Council, may note that they have been roundly beaten in the subsidy game by the government using the guise of “common man”.  While MNREGA and Food Security Act etc require positive acts of Parliament to get through, open ended subsidies like petroleum and fertilizer need positive acts from Government to check.  If government does nothing, as is UPA’s wont, petroleum & fertilizer subsidies will increase merrily while Food Security Act languishes.  NAC has been outflanked by crowding it out of the subsidy trough.


We do not support open ended subsidies of any kind, be it food or unemployment mitigation schemes.  Subsidies should be merely a way of supporting people in training to integrate them into the mainstream economy.  Farmers can well be compensated for higher fertilizer costs through higher support prices for produce.  The reason this is not done is simply because the corporate sector would be deprived of its nest egg in the shape of assured post tax returns on net worth.  Similar is the case of petroleum subsidies and assured post-tax returns to refineries.  While it is difficult to explore the ridiculousness of the government’s assured post-tax return on net worth here, we may note that the formula is open-ended in time.  If a fertilizer plant or refinery’s entire plant is depreciated in say 10 to 15 years, then the subsidy on the same should also end in a similar period of time.  Instead, the subsidy continues in perpetuity!  That is the dirty little secret of assured post-tax return and why the corporate sector loves the scheme.  One wonders why the government has not woken up to the implications.


Subsidies need to be brought down to about 1.50% of GDP immediately if we are to avoid bankruptcy.  The government itself promises to bring subsidies down to 1.90% by the end of 2013.  How that may be accomplished with a looming draught and falling growth rate is uncertain.  We will return to this topic in another article.


Time Sonia Gandhi, government and the opposition, woke up to the imminent disaster.  Subsidies now total 4.90% of GDP and about 10% of all incremental output is being eaten up by subsidies.  If reforms are not forced through, and petroleum subsidies cut to zero forthwith, the country does not have the reserves to last beyond 2013/14.  Who-so-ever takes over government in 2014 will have a bankrupt economy with no latitude for any maneuver.  If we do not reform now, UPA will follow a scorched earth strategy in the ensuing election year in a bid to garner as many seats as possible.  So it is in the interest of all parties, no matter who wins 2014, to reform now and compete for votes on some other basis.  Stalling reforms is not an option any more.


Growth in subsidies under UPA

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