The costly ticket to achche din

narendra_modi
A few days back a friend complained on Facebook that since the Narendra Modi government had come to power, power cuts in his city had gone up dramatically, and he had not been able to sleep at all during the night. “So where are the
acche din that had been promised?” he asked. To this someone cheekily replied that the promise was of acche din and not acchi raatein.
Narendra Modi and the Bhartiya Janata Party fought the Lok Sabha election on the plank of “acche din aane waale hain”. The slogan offered “hope” to the people of this country, in an environment where economic growth had been falling and inflation had been rising. It was for the first time that a political party was not treating the voter as a “victim”. The slogan struck a real chord with the Indian voter.
The success of the slogan has now led to a scenario where every tough economic decision that the Modi government makes is and will be viewed through the lens of the “
acche din aane waale hain” slogan. Take the recent case of the decision to increase the railway passenger fares by 14.2 per cent and freight fares by 6.5 per cent.
The hike in railway passenger fares has been the steepest in 15 years and has been long overdue. Between 1999 and 2014, the passenger fares were increased only thrice, of which one hike was reversed. This has left very little money with the railways for any sort of modernisation and the upkeep of railway tracks. It has also led to a scenario were traveling has become increasingly unsafe, as can be made out from the spate of railway accidents over the last few years.
The trouble is that for too long Indian Railways has been used as a political tool and not a service which is economically viable on its own. One way to correct this is to index fares to the prevailing rate of inflation and increase prices on a regular basis, every year. So, if the inflation is 8 per cent during the course of the year, then fares can go up by 8 per cent at the beginning of the financial year, on April 1. If this practice were to be followed, the chances of railways being economically viable and safer are likely to go up. Also, it would rule out the chances of one-off increases in fares, which upset the monthly budget of people who use the railways to travel regularly.
In the short-term, this increase in fares is expected to add to inflation. There are other decisions that the government will have to make over the next few months which will add to inflation. Take the case of oil. The price of the Indian basket of crude oil stood at $111.94 per barrel on June 19, 2014. It averaged at $106.72 per barrel between May 29 and June 11, 2014.
The price of oil has gone up by close to 5 per cent in such a short period of time primarily because of a threat of war in Iraq. India imports 80 per cent of the oil it consumes. The government will have to pass on this increase in the price of oil to the end consumer. If it does not do that it will have to compensate the oil marketing companies for the “extra” under-recoveries they are likely to face on the sale of diesel, cooking gas and kerosene. This would lead to an increase in government expenditure and, hence, the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government is already very stretched on the fiscal deficit front with the last government leaving unpaid bills of more than Rs 1,00,000 crore. Hence, it will have to pass on the increase in the international price of oil to the end consumers. This will mean higher inflation and another jolt to the promise of
acche din.
What makes the situation even more difficult is the fact that the monsoon is expected to be much lower than average this year. In fact, data from the India Meteorological Department shows that rainfall upto June 18 has been 45 per cent lower than normal. This number may improve in the days to come, given that it is still early days for the monsoon. It needs to be pointed out that a bad monsoon does not necessarily lead to a lower production of food. In 2009, even with a 22 per cent deficient rainfall, the agriculture production did not go down. The real problem is once the psychology of drought sets in, the prices of food products start to go up, even though their production may not be impacted.
One thing that the government can do to prevent inflation is to procure a lower amount of rice and wheat from farmers this year. As on June 1, 2014, the Food Corporation of India (FCI) had food grain stocks of 74.8 million tonnes, when it does not require more than 41-47 million tonnes. By buying less from the farmers, the government can ensure that more rice and wheat lands up in the open market, and helps prevent a price rise. The government also needs to ensure that it does not raise the minimum support price of rice and wheat at the rate that the Congress-led UPA government had done in the past. These moves are unlikely to go down well with the farmers, who have also been promised
acche din.
It is important that Mr Modi borrows a leaf from Franklin Roosevelt, the President of the United States between 1933 and 1945. This was a difficult time for the US — the Great Depression was on. Between 1933 and 1944, Roosevelt made 30 fireside chats through the radio, explaining to Americans the tough decisions he was taking to get the economy back on track. Mr Modi and his government need to keep talking to the people and explain why they need to take some tough decisions over the next few months.

The article originally appeared in The Asian Age/Deccan Chronicle on June 23, 2014

Vivek Kaul is the author  of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

2 Responses to The costly ticket to achche din

  1. Krishnaraj V says:

    Why have the passenger rail fares been increased 14%? Why not 13 % or 15%? What is the basis as stated by the Govt for this increase? What am I as a rail passenger going to get by paying this increased amount? How will I be able to hold the Govt / Railways accountable for what it says it will give? Will this increased amount go towards finance BJP’s campaign expenses via tunnelling?

    Why did Modi say when UPA was in power that the Rail Fare hike was not justified and that it should have been discussed in Parliamant?

    I wish the article had addressed these issues; but the article seems to say that the old Govt has left things in a mess.

  2. Deepesh S says:

    There seems to be some confusion in media regarding these hikes or I might not have understood it correctly.

    The actual hike in railway passenger fair is 10% and freight fare is 5%.
    While 4.2% and 1.5% are fuel adjustment charges(FAC) which will be revised in every six months.

    So effective hike should be more than 14.2% as it is like (4.2% on ( 10% on current fare)) … so somewhere like 14.62 %

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