The Economist on India's bureaucracy

Bashing the Indian bureaucracy is pretty much in fashion today, so one is not surprised to find the Economist weighing in:

Some economists see India's malfunctioning public sector as its biggest obstacle to growth. Lant Pritchett, of the Kennedy School of Government at Harvard, calls it “one of the world's top ten biggest problems—of the order of AIDS and climate change”.

....In India's corrupt democracy, the collectors' burden is made much heavier by interfering politicians. The problem is most grievous in north India, where civil servants tend to attach themselves to politicians for enrichment, advancement—or in despair of otherwise getting their jobs done.

The reasons trotted out for poor performance are familiar enough: declining quality of recruits (one is not sure how far this is true, the IAS remains extremely competitive), poor pay, interfering politicians, permanence of tenure, etc. But those who criticise the bureaucracy need to do some explaining: if it is all that bad, how come Indian economic growth has sprinted over the past two decades? Do we give the bureaucracy some credit for this or not?

The Economist notes that significant downsizing has taken place: some 750,00 jobs remain unfilled, so a leaner bureacracy is supporting higher volumes of work. Just to look at the brighter side, let me mention two areas where the bureaucracy does deliver. One is disaster management- the response to major catastrophes is much better in India than in many other parts of the world (think of the US response to the hurricane in New Orleans). The other is the conduct of elections in remote, insurgency-infested areas.

These are not the work of the office corps alone. It's the people down below, the much maligned clerks and peons, who contribute a great deal. Surely, there must be some merit in a system that can produce outcomes in these two situations?

It's only the markets, stupid

Markets are crashing everywhere, including in India. Watching stock price declines on TV screens, it's easy to think this is the end of the world.

Hold on. Markets are only an imperfect barometer of the economy. They may get the direction right but not the magnitude. So, a falling market could indicate a slowdown but a crash need not mean a recession. Similarly, a sharp rise in the market does not mean growth has accelerated. Asset prices are prone to "overshooting" in either direction.

I emphasis this because the recent crash in the Indian stock market is being interpreted by some as sign of a serious slowdown- to say 7% or even 6%. People point to the decline in industrial growth rate in January and see this is as confirmation.

I am not sure that the prospects for either the Indian economy or the world economy are as grim as some are painting it. My detailed comments in my Et column, Is it just a blip or a slowdown?

Was Bear unlucky?

Liquidity risk explains Bear's downfall more than any other factor. Bloomberg has some interesting statistics on this. Model-derived assets that are hard to value, known as level 3 assets, amounted to 239% of Bear's equity. But other investment banks seem to have about the same levels. They are safe- so far. The Fed announced a special facility for prime brokers only after Bear's collapse. That may have saved Lehman. But Bear was allowed to go under. Was Bear unlucky? John Gapper, writing in FT, puts it all down to poor leadership.

So Lehman got more support than Bear. But you make your own luck and Lehman had already taken firmer action to bolster its balance sheet – its cash cushion was double the size of Bear’s. It also mounted a tough and disciplined campaign to reassure the waverers; on its Tuesday results call Erin Callan, its 42-year-old chief financial officer, rattled off lots of figures to prove its strength.

Bear’s leaders were nothing like as hard-working or assertive in defending their bank in the year leading up to its demise. Mr Schwartz, a laid-back corporate financier and former analyst who lacked any experience of running a securities trading business, had put more effort into outreach but lacked the time, and perhaps the appetite, to fight back effectively.

The truth is that Bear’s leadership was old, self-satisfied and inbred. It had become used to telling the same jokes, travelling to the same bridge tournaments and treating the rest of Wall Street with disdain. And when the going got tough, it allowed its institution to perish.

Gillian Tett, writing in FT, has a slightly different take. She thinks Bear Stearns became a "sacrificial lamb" in the Fed's efforts to stabilise the market. The Fed had to organise a rescue of Bear; at the same time, it had to guard against moral hazard. Rescuing Bear while wiping out shareholders seemed the best course:

In place of a tethered goat, in other words, we now have a stricken Bear being offered up to attone for Wall Street sins – and, perhaps, slay the demons of moral hazard, at the same time.

Hmmm, sounds plausible. Could it be also that Bear paid the price for its hauteur and aloofness on Wall Street? Remember, Bear Stearns was the only top investment bank to refuse to get involved in the LTCM rescue orchestrated by the Fed in 1998. It ignored a key maxim for all financial players: always stay on the right side of the regulators

Lessons from sub-prime crisis (contd)

I had a post earlier on this topic. The Economist reviews a book, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash -Charles R. Morris, that makes a number of suggestions:

He offers a raft of suggestions: originators should retain the riskiest portion of securitised loans; prime brokers should stop lending to hedge funds that fail to disclose their balance sheets; trading of credit derivatives should be brought onto exchanges for the sake of safety, even if this raises costs; and some version of the old Glass-Steagall act, which separated commercial banking and capital-markets activities, should be re-introduced. Ultimately, he argues, after a quarter-century of “market dogmatism” it is time for the regulatory pendulum to swing the other way.

The Fed crosses into new territory

The Fed broke new ground this week in trying to avert a financial collapse. First, it took direct exposure to Bear Stearns' assets worth $30 bn- people would be justified in viewing this as quasi-nationalisation.

Secondly, it created two new faciliies allowing it to act as lender of last resort to non-bank financial institutions- in this instance, primary dealers. John Berry of Bloomberg describes these:

Aside from helping in the sale of Bear Stearns, the extraordinary actions the Fed took included creation of a term securities lending facility on March 11 and a primary dealer credit facility on March 16.

Both involved the group of 19 securities dealers known as primary dealers — companies that have qualified to participate as counterparts in the New York Federal Reserve Bank’s daily open market operations used to keep the federal funds rate close to the FOMC’s chosen target. Bear Stearns was on the list until its abrupt sale.

Under the first facility, the dealers will bid at weekly auctions beginning March 27 to obtain 28-day loans of Treasury securities in exchange for certain other collateral such as mortgage-backed securities insured by Fannie Mae and Freddie Mac. There will be separate auctions for exchange of Treasuries for AAA/Aaa-rated private label mortgage-backed securities that are not on review for downgrade.

The point is to take some of the pressure off the stressed mortgage-backed securities market. The other facility began yesterday to give primary dealers access to overnight credit from the Fed in exchange for collateral such as mortgage-backed securities, municipal securities and investment grade corporate securities. Normally, only financial institutions can borrow directly from the Fed.

Valuation of Bear Stearns

They say Bear was sold for a song- around $230 mn. Not true. JP Morgan has taken a charge of $6 bn, so the cost comes to $6.3 bn. The building costs $ 1bn. So, we could say the financial assets were valued at $5.3 bn. Last week, the market was a little over $7 bn. So, we are talking a discount of 25% to market price before this week's run on Bear. I read that Sanford Bernstein had valued the bank at $7.7 bn before this week's crisis.

Nothing wrong with the valuation- except that Bear shareholders have almost wiped out.

Alan Greenspan on risk management

The erstwhile Oracle of the Fed holds forth on risk management in FT:

I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world. The exploration of the benefits of diversification in risk-management models is unquestionably sound and the use of an elaborate macroeconometric model does enforce forecasting discipline. It requires, for example, that saving equal investment, that the marginal propensity to consume be positive, and that inventories be non-negative. These restraints, among others, eliminated most of the distressing inconsistencies of the unsophisticated forecasting world of a half century ago.

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling – the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters’ concerns should be not whether

Bear Stearns' collapse- LTCM all over again !

Bear Stearns, one of the top five investment banks in the US, ends its 85-year old existence as an independent bank. JP Morgan announced on Sunday that it is acquiring the firm for $2 per share or a total value of $235 mn. This does not reflect the full cost to JP Morgan. Bear Stearns faces several lawsuits relating to the collapse of its hedge funds, so Morgan has to set aside $ 6bn towards litigation costs. Morgan acquires the $1 bn headquarters of Bear.

What a fall, my countrymen! Bear's share was valued at $169 last year and $30 last Friday. Bear's top management and hundreds of employees who have been rewarded heavily through stock options- think of what happens to their investment!

Jimmy Cayne, the chairman, himself was said to be poorer by more than half a billion dollars in a week's time. His holdings were worth $ 1 bn at one time. Now, it's said he gets all of $12 mn. People will say he asked for it- he must bear responsibility for pushing Bear into high-risk mortgage securities. That's not all. FT reports that JP Morgan is likely to sell off many of the pieces of Bear, including the investment bank, and lay of many of Bear's 14,000 employees.

Bear Stearns was different on Wall Street. It did not rise to the top meteorically. It clawed its way gradually without fanfare, without headline-grabbbing acquisitions, for instance. Its management culture was distinctive. It was an aggressive risk-taker and prided itself on its ability to manage those risks. Insiders used to talk of 'sweat sessions' between top management and leading traders where management would grill traders on their positions- the grilling was so intensive that those who concealed anything would start sweating.

Until about a decade ago, Bear shunned MBAs and management consultants. It hired ordinary guys with spunk and trained them to deliver. Base salary for top management was among the lowest on Wall Street; the firm believed in heavily compensating those who delivered. A big chunk of the firm's shares were held by employees awarded stock options over the years- that's why Bear's collapse will hurt its employees even more. Bear was also less diversified than other Wall Street firms and less international in its operations. But it kept shareholders happy year after year until it was undone by the disaster that hit its hedge funds recently.

Did Bear deserve such a fate? Of course, it was highly leveraged. Its capital of %11 bn was used to support a balance sheet of nearly $495 bn. But that's not new. Lenders have been happy to make funds available to Bear. It's just that, in today's conditions, confidence is scarce. That makes all the difference to a highly leverage institution.

Rumours have been rife about Bear's troubles, so every lender wants to pull out. The only way Bear can meet their demands is to sell assets. Asset prices tumble, the liquid assets disappear and then only illiquid assets are left. A liquidity problem quickly becomes a problem of solvency. Those who watched the collapse of LTCM will have a sense of deja vu.

Farm loan waiver: net impact on banks

Okay, the FM has given the details of the farm loan waiver package. I notice that the commercial banks' exposure in the overdues of Rs 60,000 crore is 35% or nearly Rs 21,000 crore- a lot higher than the figure of Rs 10,000 crore that papers had mentioned earlier. Cooperatives and regional rural banks account for the rest.

As for the package itself, the government will provide cash to lenders as follows:

• Rs 25,000 crore in 2008-09
• Rs 15,000 crore in 2009-10
• Rs 12,000 crore in 2010-11
• Rs 8000 crore in 2011-12

I am still not clear as to whether the Rs 60,000 crore constitutes gross NPAs or net NPAs. The figure is said to constitute "all farm overdues" in the eligible categories. That sounds like gross NPAs.

This means that banks that have made provisions can write back these provisions and make gains as a result. But, in 2008-09, they will have to write off the entire amount, including the unprovided portion. So, in 2008-09, their bottomline will take a hit in net terms. In the subsequent years, there will be gains to the bottomline as cash flows in against amounts written off.

However, if the banks are writing off Rs 60,000 crore, the compensation in present value terms is smaller than this amount. Banks will gain to the extent of provisions already written off; they will lose to the extent that the compensation is less than Rs 60,000 crore in present value terms.
It's hard to say what the net effect is. Probably a small gain, although this could vary from bank to bank. On the whole, listed bank stocks should gain.

Some rosy forecasts for the Indian economy

Interesting.....Investment banks' and commentators’ pessimism about the outlook for the Indian economy in 2008-09 is not shared by others. J P Morgan has revised its GDP forecast for India downwards to 7% for 2008-09.

In contrast, Finance minister P Chidambaram thinks the Indian economy will grow at 8.5% this year. So does the PM’s economic advisory council headed by C Rangarajan. India’s chief economic statistician, Pronob Sen, forecasts growth of 8%. The CMIE expects growth of 9.1%, higher than the 8.9% it projects for 2007-08!

Fair value accounting in the financial sector

I have flagged this issue before. Fair value accounting has come to the fore as a vexed issue in the present financial market crisis. Loans are not marked to market, so banks should not have had to worry. But they hold marketable securities and have huge positions in derivatives, both of which are marked to market. That is why banks- and not just investment banks or hedge funds- are feeling the heat this time around. FT carries a detailed report:

As the losses rise, anxiety is growing over the way these hits are being
measured. At present, accounting is dominated by a concept of “fair value”: companies are expected to report the value of their holdings in as “current” a manner as possible, which in practice means marking to market prices.

However, there is mounting concern that this approach creates distortions when markets are as dysfunctional as they are now. Indeed, some bankers fear that the system is actually making the crisis worse. Far from offering a reassuring yardstick, it is forcing banks and hedge funds to sell assets in a manner that is stoking investor panic...

...Many investors are sceptical about the accuracy of models used to
estimate the price of untraded assets. “When markets dry up there are problems with mark-to-market disclosure because there are no markets. Then people have to use mark to model but there are big problems with that too,” observes Charles Goodhart, professor of finance at the London School of Economics.

US will avoid recession?

I don't get this. When US economic prospects looked grim a couple of months, the stock markets seemed not to notice. Now even the occasional good news, including the Fed's determined effort to stave off recession, gets shrugged off by the markets.
I am among those who believed- and still believe- that the US economy could ride out the financial crisis without a serious slump. The University of California's quarterly Anderson forecast, released this week, is upbeat compared to some of the other stuff we have seen recently. The forecast expects US GDP growth of 1.5% this year, rising to 3% next year. Growth in 2007 was 2.2%.

The other good news comes from the Fed. The Fed still believes that the US will avoid a deep and prolonged recession such as that experienced by Japan in the nineties. Why? Because US policy makers will do what it takes to avoid recession.

Joy on Wall Street!

Wall Street continues to be rocked by the sub-prime crisis but there is some joy from an unexpected source. Mark Spitzer, Governor of New York and former attorney general of the state, is in trouble over his alleged involvement in a high class prostitution ring. Spitzer has tendered an apology of sorts and is under pressure to quite after federal wire-taps are said to have implicated him as a client of the prostitution ring.

Spitzer went after Wall Street firms in a big way and was responsible for the multi-billion dollar settlement with top firms after the Internet bubble collapse in 2002. Spitzer also prosecuted those involved in two prostitiution rings at the time. Seeing this crusader of yesteryear the receiving end has given some delight to investment bankers who took some pounding from him.

Legions of Wall Street’s bankers, traders and investors relished the dark clouds enveloping New York governor Eliot Spitzer, who on Monday informed his most senior administration officials that he had been tied to a prostitution ring, the New York Times reported.

.....“The guy is a quintessential hypocrite,” said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion. News of Spitzer’s political fall from grace, however, did little to lift the mood on Wall Street. “I would think the markets would rally off this news as it brings some relief to Spitzer’s dealing with Wall Street and traders,” said Gundlach of TCW

Incidentally, bashing Wall Street has been one sure route to high office in the US. Spitzer is not the only one to have made it big. He was only following in the footsteps of former New York Rudolph Guiliani who made a name for himself in an insider trading scandal when he was New York attorney general.

Objections to loan waiver scheme

I read that the financing of the loan waiver scheme announced in the budget has been firmed up. The FM will disclose this to parliament on March 14.

I have been a guarded supporter of the scheme as readers of this blog would know. I think it's a good scheme as long as the burden is borne by the government and not by the banks.

In the meantime, I have seen a barrage of criticism, mostly misplaced. In TOI on Sunday, Gurcharan Das called the scheme 'immoral' saying that the government should not break the bond of commitment that the borrower has towards the lender. As immoral, I suppose, as the US Treasury which has asked banks to restructure many of the sub-prime debts.

The contractual relationship between borrower and lender is redone all the time- it may not be at the best of the government. But when this happens to businesses, there's not a squeak from anybody. Think of some of the big names in Indian industry that have benefited from such restructuring, which often includes sacrifices from banks.

Das says that hereafter farmers will not have incentives to repay. Not true. As we know in the case of businessmen, you can get away with default only once. Once you default, you lose access to credit. So there are huge penalties to wilful default. This holds for farmers as well. I would only say that we should extend the newly created credit bureau to the rural areas and keep tabs on individual payment histories to strengthen incentives to repay.

Swaminathan Aiyar, writing again in the Sunday TOI, says that banks will hereafter be wary of making loans to farmers and such loans will be hard to come by. Not necessarily. Most of the bigger banks are government-owned. Both government and the RBI will be leaning on banks to meet loan targets (which is why rural credit has doubled in the past three or four years). Banks may try to get around this by avoiding small farmers but keeping separate targets for each category of farmer could address this issue as well.

Aiyar also says that farmers who have been repaid loans will be angry that others are being cosseted and this will cost the UPA dearly at election time. Do businessmen, who have repaid loans, get upset when businesses in distress get special treatment from banks? I don't know why farmers should behave any differently.

Subir Gokarn, writing in Business Standard, says that we need to ensure proper incentives hereafter giving a concessional rate on fresh loans to those who have made repayments this time. This makes sense- and indeed ties in with the idea of a credit bureau I mentioned above that will monitor payment histories.

The scheme brings a smile to farmers' faces. Banks will have their balance sheets cleaned up. Government can minimise the burden to itself by raising funds through disinvestment- and seeking the Left support for this, saying it's for a good cause. It's win-win for the most part. Who loses? Economists and columnists!

No housing bubble in India

Housing prices elsewhere have collapsed. There has been talk that India might witness such a correction. Rubbish. There's no real estate bubble here, as Keki Mistry, MD of HDFC pointed out recently.

True, housing prices have shot up. True also that EMIs have gone up thanks to the increase in interest rates. But, compare affordability- income in the relevant segment to EMIs- with those of 15 years ago and you realise how far we have travelled. This ratio is 4.9 today, according to Mistry, compared to nearly 15 about ten years- an improvement by a factor of three!

Affordability is better for a number of reasons:

• Sharp increases in income
• Lower interest rates
• Tax incentives for housing

Remember this the next time somebody comes up with a doom scenario for India arising from a collapse in housing prices similar to what we have seen elsewhere.

Exaggerated bank 'losses' in sub-prime crisis

ICICI Bank makes a provision of $265 mn against mark-to-market positions. The stock tanks- and so does the Sensex. Does this make sense?

I think not. There is huge overshooting of asset prices in panic conditions- that is, prices go well below "fair" value. Naturally, mark-to-market losses will be commensurately high. Once the market bounces back, these provisions will be written back.

We have it on the authority of Fed Chairman, Ben Bernanke, no less, that bank writedowns have been overdone in the present crisis. He said as much in his congressional testimony on February 28. How does this happen? Many of the assets are not traded. So marking to market is done using certain indices. These indices' movements don't correctly reflect actual losses. One analyst points out that one index shows an 8% potential loss in commercial real estate when the real loss has been one quarter of 1%. As the Yanks would say, the thing sucks.

There is a larger issue here: how do we enforce mark-to-market requirements in such crisis situations? As Gillian Tett points in the FT, "The western financial system is caught in a trap. On the one hand, there is an urgent need for clearing prices to be established for impaired assets to restore confidence; on the other hand, if this is done in a mark-to-market world, there is a risk that some banks will run out of capital."

One solution proposed is a six month grace period for marking to market. But this could undermine investor confidence- people won't know what sort of losses a bank is hiding. I can't see an easy way out. But I am glad we don't have mark-to-market requirements for bank loans although investment bankers have long demanded this in the interest of having a level playing field between investment banks and commercial banks. Can you imagine the havoc that could wreak in such conditions?

Coming back to ICICI Bank, the stock price is close to its last FPO price. If I were an analyst taking a long view, I would put a 'buy' recommendation.

PIL challenge to loan waiver scheme

The Supreme Court has refused to hear a challenge to the Rs 60,000 crore farm loan scheme proposed in the recent budget, TOI reports. Chief Justice Balakrishnan said that the SC could not entertain the PIL at the present stage when the proposal was being discussed in Parliament. Any hearing could happen only after the proposal had been approved by Parliament.

However, the TOI reporter says that the legal challenge could still continue. He points out that in the case of Mandal II, a bench of the SC decided to entertain a challenge even before the relevant Bill had been passed by Parliament:

Going by Justice Balakrishnan's reasoning, the PIL should not be entertained till at least the proposal is pending in Parliament. In other words, it should be dismissed outright. But since it could come up before any of the benches, there is no predicting the outcome of the PIL.

Barely two years ago, a bench headed by Justice Arijit Pasayat entertained a PIL on another contentious issue, Mandal II, even before the Bill concerned was introduced in Parliament. And when the Bill was subsequently introduced, Justice Pasayat stretched the system to the extent of telling Parliament not to proceed with it till the court decided its validity. It was only after the government's counsel protested that the judiciary could not interfere with legislative functioning, Justice Pasayat toned his order down to saying that a copy of the parliamentary standing committee's report on the Bill should be "placed in a sealed cover before this court."

In the event, the sealed cover was rendered meaningless as the government gave the report to the court only after it was tabled in Parliament.

The general rule, however, is that since a Bill is merely a proposal and not legislation, it falls outside the domain of the courts. This is because a Bill has no legal force and is liable to be changed or even dropped by Parliament.

As for the farm loan package itself, I think the opposition to it is overdone. The cost of Rs 60,000 crore is eminently affordable. It is a one-time cost whereas the tax deductions given on income tax - which would amount to Rs 4000 per month for those earning more than Rs 10 lakh- are forever. My main concern, as I point out in my Et column, is that the banking system should not be loaded with the cost. The government should pick up the tabs.

There are , of course, many implementation issues. Farmers who have repaid their loans are being penalised. So are banks that have already made provisions. But the point about such packages is that you help those in distress. Those who can pay or who can cover the cost do not need government support.

There are other issues. Distress may not have to do only with the size of the farm- somebody with over 5 acres in a rainfed area may be worse off than somebody with a small farm in an irrigated area. I have also seen reports that the package may not help those who have borrowed heavily from money-lenders. Note, however, that the Radhakrishna committee on distressed farmers had favoured help to this category as well through a long-term loan.

Code on bankers' pay

As somebody who was amongst the earliest to raise the issue of incentives in banking as a source of instability, I am gratified to note that a code on bankers' pay is under consideration at the Institute of International Finance.

Ideas being floated include bonuses being deferred until the full impact of bankers’ strategy is clear to prevent them benefiting from short-term high-risk bets that subsequently turn sour.

Another variant would see those who lost money for their businesses having to earn it back before they secured new bonuses. However, the concept is likely to prove highly controversial, particularly among investment bankers in London and New York. “It does not sound workable,” said a senior Wall Street executive, who argued that it was highly unlikely Wall Street banks would agree to any kind of uniform compensation rules for fear of giving up a competitive advantage.

Centre's subsidy bill

How large is the central government's subsidy bill? The latest budget papers show a figure of Rs 66, 537 crore. Fertiliser and food subsidies acount for Rs 32,000 crore and Rs 31,000 crore respectively. Then, there are petroleum, interest and other subsidies.

In addition to these figures, the budget shows off-balance sheet bonds on account of over Rs 18,000 crore. This is just 0.3% of GDP. According to the Economic Survey, subsidies as a proportion of GDP have been declining over the years- they have come down from 1.7% of GDP in 2002-03 to 1.1% in 2007-08. Add the 0.3% of off-balance sheet subsidies to the figure of 2007-08 and it is 1.4% - still lower than the figure of 2002-03. So, it does appear that even if the absolute amounts of subsidy are going up, as a proportion of GDP, subsidies have, in fact, been contained.

The fly in the ointment is the estimate of off-balance sheet subsidies. The PM's Economic Advisory Council estimates off-balance sheet bonds on account of subsidies at 2% of GDP, way above the government's figure of 0.3% of GDP. The IMF had estimated at 1.2% of GDP.

The differences arise because the government has not met its subsidy commitments in full. But these commitments have to be met and we should expect more issuance of bonds. If we add the EAC's estimate of 2% of GDP to the figure shown in the budget, the total cost comes to nearly Rs 3.2% of GDP. That would be a significant increase over the level of subsidies in earlier years.

We need some clarity on the total amount of subsidies- in the budget and outside it.

What is the correct fiscal deficit figure?

The budget for 2008-09 shows a fiscal deficit to GDP ratio of 2.5%. Critics scoff at this figure. They say it does not include three things: the proposed loan waiver of Rs 60,000 crore, the Sixth Pay Commission report and off-budget subsidies.

The details of the loan waiver, we are told, will be revealed later. The key issue is what proportion of the burden will be borne by the exchequer and what proportion by banks. The costs of the exchequer, it is reasonable to suppose, will be borne through the issue of bonds. That too in instalments. Assume that Rs 40,000 crore is the burden on government and this is borne over three years. The annual impact of the fisc would be insignificant- 0.3% of GDP.

The Sixth Pay Commission is estimated to cost around 0.5%of GDP annually. Arrears may be staggered over a few years.

The FM claims that,for the first time, there is transparency in respect of off-balance sheet subsidies. These are shown in 'budget at a glance' at around 0.35% of GDP. The PM's Economic Advisory Council estimates these at 2% of GDP. Queried on this point by Business Standard, the FM retorted that the question should be put to the EAC!

Where lies the truth? Well, the FM js technically correct in that the figures shown in the budget show the value of bonds issued thus far. But the bonds issued so far do not cover the dues payable to fertiliser and oil companies in full- this figure is the correct figure for contingent liabilities of the government of India because the government is committed to paying these.

If the disclosure in the budget is what is meant by transparency, we can do without it.

Incidentally, going by the above assumptions, the adjusted fiscal deficit would be closer to 5.5% of GDP if you include the value of subsidies payable in full.