Wednesday, January 1, 2014

Two of My Posts from last year not updated on the blog

Charlatan Caesar & Voodoo Economics

First Eco Post for this year, I am afraid to say that this year has not started on a very bright note. The capital of India is ruled by a Marxist party and like all Communist parties initially do, they also are wolves that have come in sheep's clothing. To be fair our country's economic agenda was being directed by NAC through proxy for almost last 10 years it's just that these characters are now coming in the foreground. Infact two of their main members wanted to be part of NAC sometime back but were denied entry, so now they plan to have one of their own in the national capital!!! Readers following me on FB & twitter are already aware of my despise for them & that is because of good reason. These kind of policies & groups take our nation down the drain, look what has happened in the last few days; with the announcement of a slew of subsidies a race to bottom has begun with demands for cutting electricity & water tariffs coming from many parts of the country. That is the reason I call these parties as dangerous & should be finished off at their infancy. Unfortunately they have generated a kind of romantic juvenile fantasy and many people are just following it like those small creatures followed the Pied Piper; I am sure you know where. All I remember right now is a quote by Mark Twain that says ~ "It's easier to fool people than to convince them that they have been fooled". Alright so after a long prologue coming to their recent economic actions........

So like any socialist party as soon as it got to power it has announced a slew of subsidies or in other words indirectly funding its election campaign using other people's money. Some of my friends are trying to justify these subsidies by giving them funky names and how subsidy provided in particular for water supply is path-breaking and can really lead to water conservation. Really!!! I would address each of these points specifically but "Governance" is not doing sham of symbolism everyday by the roadside & transferring benefits from one pocket to other or from the future to the present (subsidies) but efficient delivery. Had the revenue received from water been put into improving supply that would have been delivery & corruption free government but this kind of governance requires time, experience & creativity and doesn't deliver "quick votes" which they are really after!!!

First let’s discuss about subsidies in general. Well directed subsidies sometimes are needed but essentially any subsidy can be funded by 3 ways:                                                                                                   

1)    Cross Subsidy: Increasing price of some other service or the increasing the skew of the same service provided by the government to fund the subsidy, well it does have some merit and so we already have progressive pricing slabs in almost all services & IT taxes, however increasing skew big time gives rise to market anamolies & malpractices, we already observe this in the oil sector where there is a huge price differential between kerosene and petrol & the sale of diesel SUVs

2)    Increasing taxes: Since I am talking of state finances here let me restrict to that, a State in India can raise resources mainly through indirect taxes which is not progressive, so a poor pays the same as rich and hence revenue raised by increase in subsidy would come back to hit the poor the most and also leads to mispricing of 2 or more resources, the subsidised product & the ones that are taxed thus leading to unwanted alterations in the economy. So for e.g. increase taxes on a product would lead to reduction in demand -> thus reduced production & supply -> less employment -> less demand for other products thus a vicious cycle of lower growth & with less production & taxes of higher inflation.

3)    Taking on debt: The worst of all measures to raise revenue by government, increase in unproductive credit (till recently by this UPA government as well) which in other words means increase in money supply without concurrent increase in actual supply of goods & services is inflationary. Always remember inflation hits the poorest the hardest because it essentially means a transfer of wealth from people holding fiat (government money) to the ones holding real & financial assets (rich people).

So with this background let’s pick on the water subsidy sham. First let me talk about how grossly misdirected this subsidy really is. Delhi is the second most prosperous city in the country after Mumbai and second most prosperous state in this country after Goa. DJB has about 1.5 million connections that would cover around 8-9 million people. However more importantly this leaves out people living in jhuggis, slums & many unauthorised colonies. So essentially the poorest section who would still spend about 120-150 rupees for 30 min of tanker water & thus only caters to the middle and upper middle class section of one of the wealthiest city in the country & to what extent well about 150-200 rupees per month!!! Shouldn’t the same money be better used to increase and improve the water infrastructure & wouldn’t that be called an effective & corruption free government? 

Another argument laid out is some fantasy of water conservation, Really!!! Well one of the problem with Socialism is that it assumes people to borgs or automatons who make decisions on some obvious looking mathematical equations & that’s one of the reasons it has been a gross failure. Yes, penalties on externalities impact behaviour but if the penalties are low then to the contrary thinking they fuel the unwanted behaviour & if they are very high then they lead to malpractices. So if someone thinks that a water bill of a couple of hundred rupees extra per month of a middle class family in a well off city like Delhi would persuade him/her of conserving water then he is living in a fantasy land on the contrary for someone using less water may start using more of it to fill up the limit. Behavioural economics work in strange ways when the utility of a commodity is higher than what they are charged for. 

As an interesting example of behavioural economics to show as to what happens when utility of something is mispriced: In a city of Israel, day care centers almost uniformly closed at 4pm, parents would then pick up their kids & rarely did they came after 4:30 pm. & Why was it that they were rarely very late? Simply because one teacher used to stay back till all kids were handed to their parents & so the economic cost of being late was taking advantage of the generosity of that teacher, face him/her in the eye & apologize for the inconvenience. Then as part of an economic experiment in some of the centers a small financial penalty was introduced on parents showing up late & surprise, surprise!!! In the centers where this penalty was introduced the frequency of parents coming late shot dramatically with their tardiness level going up by twice than the pre-fine level. That is, introducing a fine caused twice as many parents to show up late. Why because the economic charge shifted now to a small fine & thus mispricing the penalty.

So enough discussed, as for electricity subsidy; see a comparison chart of Delhi vis-à-vis other cities before subsidy announcement.

So in other words the poor would ultimately end up paying for the government largesse on water & electricity by still waiting for tankers to supply them water & increased indirect taxes later on.

Delhi is a cosmopolitan city, people come here from all parts of India not because of any love for the city but based on cold calculations of how much they are going to earn, save and spend. By mispricing pubic goods & services all one is doing is inviting chaos, congestion and social tensions but probably that’s what someone wants to thrive upon.