Saudi Vision 2030, also known as Utopia

Mohammed bin Salma, the thirty year old deputy crown prince of Saudi Arabia, has just announced his country’s transition to Utopia. He calls it, Saudi Vision 2030. The concept essentially envisages a day when the Saudis will learn living without oil, or rather the money earned from oil. To achieve this a sovereign wealth fund is on the anvil. When created it will have assets worth US$ 2 trillion (according to IMF estimates, India’s GDP for the year 2015-16 was US$ 2.4 trillion). Bin Salman, second in line to the throne, also hinted at social reforms in an ultra-conservative country. He touched upon sensitive matters like women’s rights. He wants the country to start living off oil, 2020 onward. This means reducing subsidies and introducing taxes. All This will happen in just about three and a three quarters of a year from now. 

Such news makes extremely good global PR. You can read the coverage by Bloomberg, The Wall Street Journal, Reuters, The Economist, etc. But the PR apart, is the Kingdom ready for the bold steps the prince proposes? Indian Affair thinks it is not. Here is why –

The foundation

The entire euphoria the prince is trying to generate is based on an assumption that 5% of Aramco (the state oil company and apparently the largest corporation in the world) will fund the Saudi Utopia. However the problem is that no one knows what the actual worth of Aramco really is. There are no records in public domain and given the oil prices plummeting to US$ 40 a barrel, the crude under Aramco’s control might be worth much less now. Another problem is the location of oil. Most of the oil in Saudi Arabia sits on its eastern coast. That is also the region with a restive Shia  population (who are systematically persecuted by the Sunni majority). The most serious of the problems is transparency. In his prerecorded telecast the prince did not give details of how the wealth fund will be created or how the citizens will be impacted by subsidy cuts. The economic situation of the country is not pretty. Various reports suggest a huge budget deficit in the range of 13% - 15% for the year 2015. The country is expected to run high budget deficit in the next four years. The foundation of the dream is indeed shaky.

The society

Saudi Arabia is the most populous of all the GCC countries. With a large population comes the responsibility of feeding it. The Saudi citizens get unimaginable subsidies like a tax free income (both personal and corporate), heavily subsidized food (the price of a three liter milk can, at SAR 10, has not changed since at least 2010), cheap petrol and no taxes like VAT, GST or sales/service tax. These subsidies however benefit even the resident expats. On top of these are subsidies for overseas education, a lavish unemployment allowance (estimated 30 – 40% youth unemployment), soft loans to purchase residential land, a free hand in importing cheap labour from Asia, protection from foreign competition by forced partnerships with local firms (HSBC is called SAAB in Saudi Arabia), etc.

I shalt take back the subsidies from thee
Photo courtesy - Bloomberg

Like all authoritarian regimes (the Communists, the theocracies and monarchies), Saudi Arabia too has bought legitimacy by bribing its citizens with freebies. Take these freebies away from them and the subjects will rise and challenge the authority. The recent hike in water and petrol prices met with strong Twitter protests (the only uncensored protest platform). Such was the outburst that the minister for water and electricity was sacked, for his “poor handling of price increase". One can only imagine how the citizens will react if the government introduces taxes, while at the same time asks the unemployed to forego the allowance and actually work.

The women in Saudi Arabia are a suppressed lot, mandatory covering up in the abayya, no driving, male consent for surgery and overseas travel, arbitrary divorce, no jobs and so on. While the prince has some bright ideas to emancipate women, slowly; certain sections of the society might not be ready for such reforms, that they might find “radical”.

Saudi Arabia was far more liberal in the 70s than it in the twenty first century. But things changed after the siege of Mecca in November 1979, the same year the Islamic Revolution in Iran overthrew the Pahlavi dynasty. Post the siege the monarchy was forced by the Wahhabis to impose an austere or rather a radicalized version of Islam on its people. Public beheadings are common and laws are not codified. Social changes proposed by the prince might face stiff resistance from the powerful Wahhabis and the citizens alike. Weaning off a population addicted to freebies and alienating the clergy can be an explosive mix in a conservative country like Saudi Arabia.

The Utopia

The target of 2020 to start living without oil money is not ambitious by foolhardy. The general population has long resented the lavish lifestyle of the royal family. The stories of the king and his entourage spending millions on shopping in Marbella have earned enough bad press. The people feel that the royal family is having a good time at the cost of its own citizens. Now when the prince finally promises them Utopia, he wants to make their lives more miserable by cutting down subsidies and imposing taxes. A double whammy.

There are far too many risks in implementing the plan 2030. The risk of the citizens turning against the monarchy, the expats not willing to come to the country because the social reforms are too slow for their comfort and cost of living too high post the economic reforms and finally the clergy denouncing the establishment of walking away from the religion.

The environment

The reforms apart, the monarchy will have to survive in the dynamic environment the world is functioning. It has to survive the drastic steps that are being taken around the world to minimize oil dependency. Commercial nuclear fusion energy is in sight in a few decades, countries are planning to ban oil run cars, bio fuels are tested for both cars and aircraft and solar is coming up in a big way. India plans to add 20,000 MW of grid connected solar power by 2020.

Given the global aversion of oil dependence and a reducing crude price, the US$ 2 trillion wealth fund looks a bit too far away. What looks scarily close is the Corniche in Jeddah, swarmed by the Saudis seeking elections to the presidential office. 

The Mars madness – What the world fails to recognise

Mars or morsel?

We will have to wait eleven more months to see whether the Mars orbiter is indeed a success. The orbiter is expected to enter Mars’ orbit on 24^th September 2014. Once there it will look for signs of life and presence of methane. But India is not the first country to send an interplanetary probe or to look for signs of life on Mars. We have ample information on what the Martian surface looks like and we know there are no sign of life and that human life is impossible in the present Martian atmosphere. Why then is the Indian government spending millions of dollars on a programme that is useless at best and fancy at worst? Why is the government not spending that money on two thirds of its population living under USD 2 a day?

These are the arguments that the international media picked up while reporting the launch on 5^th November. They reported the launch, termed it a success and then immediately threw in the figures of aid money India receives and millions that live in poverty. This in itself is not a bad thing. After all media is supposed to be neutral and question the establishment. However, it is interesting to see whether linking the space programme to poverty by international media is fair or not.

In the financial year 2013-14 the government of India is expected to spend USD 55 billion in food and fuel subsidies. Fifty five times the yearly amount spent on the entire space programme. The recently introduced Food Security Bill (though flawed) will inject another USD 20 billion a year. There are many other programmes introduced by both the central and state governments to eradicate poverty. Add to this a few more millions in farm subsidies and we are looking at a figure close to USD 100 billion, spent on welfare schemes. The anti lobbies will argue that despite all the money spent, little has been achieved. Indian Affair will agree. But the argument of not spending on poverty elevation does not hold true anymore. The real question is that of implementing these programmes transparently and passing the benefits to the needy.

The view from the tinted glasses

The low cost space ship

The debates on international media revolved around the imagined space race between India and China and the need for a poor country to embark upon a programme, which should ideally be carried out by the first world. The Express News of the UK carried a headline, which read, “India sends a spaceship to Mars after UK government gives GBP 280 million in aid” implying that India used the aid money to fund its space programme. The German Sued Deutsche Zeitung (South German Newspaper) carried a story titled “India sends probe to Mars”. It started off well but towards the end it too succumbed to the temptation to highlighting “poverty” and “wasteful” expenditure on an expensive project. The American CNN and the British BBC were no exception. The media and public in west and especially the UK (if one reads through the comments section of various British news sites) see the launch as a fancy project. 

Almost everybody in the mainstream media of west acknowledged the fact that India carried out the mission at one tenth of the cost of a similar venture, MAVEN, by NASA (scheduled to be launched on 18^th November). What no one discussed was the mind boggling cost reduction by the Indian scientists. It is no mean feat to cut cost to a tenth for an interplanetary probe. This should have been the topic of discussion on the television debates. Curious minds should have called in astronauts and space scientists to discuss the frugal engineering by Indian scientists and how rest of the world can learn from them. They should have asked questions on future of space exploration industry and India’s role in it. They should have discussed the difficult scenario where India and China will dominate the high tech space industry, leaving the conventional pioneers behind. But they chose to ignore it and discussed poverty.

Not just a fancy toy

India’s space programme is anything but fancy. Ever since India sent its first satellite in space in 1975, Indian Space Research Organisation (ISRO) has conducted 72 launches from various launch locations in India and abroad. Over the years ISRO has helped India in telecommunication, broadcasting, weather forecasting, remote sensing, etc. The billion dollars a year that India spends on its space programme is paid at least a few times over by selling the services of its satellites to various users in India and abroad. India has also mastered the technique of sending multiple satellites into space from a single launch vehicle. The first successful launch was carried out in 1999 on board Polar Satellite Launch Vehicle (PSLV). The PSLV placed three satellites, the Indian Oceansat-I, the German DLR-Tubsat and the Korean KITSAT-3 in their respective orbits. ISRO has carried out a dozen successful multiple launches since then. The next step for ISRO will be to tap into the USD 340 billion space exploration market.

Poverty reduction should obviously be on India’s priority as a developing nation. It should take sincere steps to eradicate poverty and pull its millions out of the misery they live in today. And the problem is definitely not money. It all boils down to honestly implementing such programmes. But that is a different debate. It is surprising that the world media missed to discuss the obvious but chose to go the extra mile to ridicule a brilliant scientific achievement. We will never know whether it is a product of a prejudiced mind or fear of being left behind.

   

Neither food nor security

India is the second largest, fast growing, large economy in the world. It is also has the second largest population in the world. India is home to 1.2 billion (and counting) people. For the sake of comparison we can say that India hosts a bit more than the total population of Africa on little less than one tenth of its size. Catering to such a huge population is a daunting task, especially when it comes to feeding it. Fortunately India is blessed with large and fertile plains fed by perennial rivers and an annual cycle of monsoon.

The land of surplus

In the year 2011-12, India produced a total of 246.2 million tons of food grain (rice, wheat and coarse grains). The census of India carried out in 2011 is yet to throw up details regarding household numbers and the average household size. But according to the census carried out in 2001 India had a total of 191.96 million households and the average household size was 5.3. The 2011 census tells us that India got an additional 181.96 million people in the decade since last census. Assuming an average household size of five the additional households would number 36.4 million, bringing the current number of households to approximately 228.5 million. A simple math will tell us that 246.2 million tons of food grain and 228.5 million households will leave a little more than a ton of food grain per household per year. The national sample survey organization reports that per capita food grain consumption in 2009-10 was roughly 11 Kg per month. The average household will hence consume 660 Kg a year, significantly less than the available and hence leaving a surplus for storage/exports.

Who moved my grains?

The interesting fact however is that 42% of India’s children are malnourished and 58% are stunted. These are alarming numbers, especially when India is a food surplus country. One might ask where all the food is going. Well, much of it just rots in the extreme weather. India made huge progress in food production but failed to create enough storage facilities. A Reuters report from July 2012 quotes that as much as 6 – 19 million tons of food might perish due to lack of proper storage.

Did you work out the freebies?

But that’s just half of the story. India for many decades has a system of “Public Distribution System” (PDS). A system under which heavily subsidies food grains is sold through licensed shops. Eligible families get 35 Kg of food grains a month, rice at Rs. 5.6 (USD 0.093) per Kg and wheat at Rs. 4.1 (USD 0.068) per Kg. Unfortunately the PDS is one of the most corrupt institutions in India. In certain states less than a quarter of the eligible families get their fair share of food. The rest is siphoned off and sold in open market at a premium. An ugly nexus of bureaucrats and private shop owners play the game with impunity.

The ruling UPA government has recently introduced an ordinance (pending a vote when the parliament meets later in July 2103) providing food security to almost two thirds of India’s population. The food security bill will provide additional five kilograms of food grain at prices lower than the PDS price. The scheme will cost the exchequer INR 125,000 crore (USD 20 billion) a year. This is all good, especially since India is gearing up for the national elections early next year. But the irony is that the government plans to implement food security through the same corrupt and inefficient PDS network. There won’t be any surprises if the additional food grain ends up in open market to be sold at a higher price like the rest of the PDS grains.

One step forward three steps back

The government recently introduced a futuristic programme. Households will get the subsidy on cooking gas directly into their bank account once they pay the market price at the time of purchase. This was termed direct cash transfer. It was supposed to be extended to all kinds of subsidies. The next step for the government should have been to extend the subsidy to food grains and eliminate the corrupt nexus of PDS. Supply of more food grains in the open market would have reduced the prices and the poor could have afforded a better choice in the open market. But the government decided to load the PDS with more grains. It is anybody’s guess what will happen to the extra 62 million tons of grains which will be pumped into the PDS.

Successive governments at both centre and the states have created a society, which lives off the freebies. Free food, free electricity, free television sets, free laptops, etc. have won many elections for the politicians. None of the governments think of long term investments for the overall development of the society. Investments in public infrastructure, education and health care are hardly seen.

The poor will get the benefits of food security bill only if the PDS is eliminated and new infrastructure for proper storage of food grains is created. Pouring more into a corrupt system will not help address the needs of the poor, nor will it send a positive signal to the voters. 

Feeding a billion mouths

The green revolution, which took off in late 60s in India, made her self sufficient and virtually ended her dependence on international food aid. A mix of high yielding seeds, increased use of fertilizers and modern irrigation systems brought more land under agriculture. Today India is self sufficient and in some cases also provides food aid to other countries. Having said that there are some disturbing statistics, which paint a different picture all together. The HUNGaMa (hunger and malnutrition) survey (carried out by Naandi, a social sector organization) of 2011 was carried out in 100 focus districts across India to measure hunger and malnutrition among children. The results show that 40% of children surveyed were malnourished and 59% were stunted. The percentage of malnourished children is double that of Sub-Saharan Africa, which is among the poorest regions in world. On the positive side, the report says there is reduction in prevalence of child malnutrition with proportion of underweight children decreasing by 20.3% over a seven-year period (2004-11) with an average annual rate of reduction of 2.9%. The situation is extremely alarming.

The incidents of malnutrition can be attributed to many things. Lack of awareness, poor public distribution network, high wastage during transportation and storage, inefficient farming methods, all contribute their share in denying access to nutrition. 

Stop the rot 

Thanks to efforts during green revolution, more agricultural land was brought under assured irrigation, thus reducing its dependence on unpredictable Monsoon. In the past few years the total combined harvest of the year has been satisfactory and particularly the Rabi crop (harvested in spring). With bumper harvest for consecutive years the storage infrastructure ran out of capacity and fresh harvest was stored in open. For the last two years millions of tons of wheat were left to rot in open due to poor storage strategy. The governments at state and centre failed miserably to find a solution to the problem.

Productivity of Indian agriculture is another major concern. Successive governments have doled out large amounts on farm subsidies with cheap fertilizer and free power (in some states). This has done little to boost the per unit productivity. According to a study by Prof. Mahendra Dev of Indira Gandhi institute of Development Research, per hectare yield of rice is 3.4 tons in India, compared with the global average of 4.31 tons per hectare and 6.6 tons per hectare of China . The government should realize that freebies will never be judiciously used. Free power for example has lead to over exploitation of underground water and has depleted water tables at an alarming rate. Subsidised fertilizers coupled with poorly trained farmers on optimal usage, has lead to deterioration of soil quality. The situation is complex with staggering inequalities. On one hand there are stunted children and on the other the government is unable to deal with problems of storing excess food grain. Huge amounts are spent on farm subsidies, yet the yields are below global averages. There is an urgent need for India to embark upon phase two of green revolution.

To start with investments should be made in creating more storage facilities and modernizing the existing ones. Food Corporation of India (FCI) has become one of the most inefficient bodies which lets huge amount of food to rot and get wasted every year. FCI is also responsible for the corrupt Public Distribution System (PDS) which is the government’s arm to sell food to the poor at a subsidised rate. Even the Supreme Court of India has observed that the present system of distribution is highly corrupt and ineffective. The government should bring in transparency in its workings and shift from food subsidies to cash subsidies. Bringing in private investment in such areas will take some burden off the shoulders of the government and would introduce smooth functioning.

Lessons should be learnt from dairy cooperatives, where individual farmers with only a couple of cows are able to reach a larger market and get benefited from economies of scale generated. Individual farm holdings in India are smaller compared to countries with high per unit yield. According to the 2001 census 80% of farm holdings are less than two hectares. 62% of these were less than half a hectare. With such small holdings it is difficult for the farmers to raise capital or benefit from economies of scale. Farm cooperatives will be an ideal solution to use equipment, seeds, manpower in a collective manner and benefiting from it. This will also free up a lot of workforce for other high value jobs (according to world fact book of CIA, 50% of total workforce in India is working in farm sector, which contributes less than 18% to the total GDP).

Finally the government should provide infrastructure for quick distribution of food across the country so that artificial inflation can be curbed. Good transport infrastructure will reduce wastage and ensure availability when it is required. Food wastage in India (during transport) is colossal. Some estimated put the figure at 40% (including vegetables). Eliminating wastage is one way of controlling price. These measures will help in ensuring food security for India in the coming years and would keep prices under control. High food prices are a major reason why people are pushed back into poverty. 

The subsidy darlings

Earlier this month the government finally took a bold step to bring down the subsidy bill. It announced increase in price of diesel and a cap on number of subsidized LPG cylinders to just six per year (in some congress ruled states it is since revised up to nine per year). The news enraged the Facebook using Indian middle class. The twitterati went berserk with innovative tweets and the country shut down for a day in protest. Well, almost. However, of all the people upset by diesel price hike, people driving diesel SUVs were the worst hit.

Please do not snatch our crutches 

According to the ministry of petroleum and natural gas, in the year 2010-11, the government gave a subsidy of USD 637 million on Public Distribution System (PDS) Kerosene and domestic LPG (Liquefied petroleum gas). On top of this the oil marketing companies made an under-recovery of USD 17.1 billion. The under-recoveries were paid for by the government cash assistance to the tune of USD 8.995 billion (52%), by upstream NOCs (oil exploration companies) for USD 6.647 billion (39%) and the oil marketing companies paid for USD 1.512 billion (9%). Half of the money was paid for by the government in cash assistance on top of the subsidy.

The cash assistance of USD 8.995 billion must have been financed by tax money or borrowing. Now the interesting thing here is that India is running a huge fiscal deficit. For the year 2011-12 it stood at 5.8%, way above the budget target of 4.6%. The target for this year is 5.1%, which is unlikely to be met, thanks largely reduced economic activity. Ideally the government should look at reducing cost (like most corporations do) to bring the deficit down. Doing away with the subsidy is one of the many steps the government can take.

Often there are emails and Facebook shares suggesting how Indians are being crushed under expensive fuel prices while our neighbours enjoy fuel at less than half of what we pay. The truth however is

Country	Petrol	Diesel	LPG
India	68.46 (Delhi)	46.95 (Delhi)	400/14.2 Kg (Delhi)
Pakistan	55.55	52.19	786/11.8 KG
Sri Lanka	59.72	48.4	881/12.5 Kg
Bangladesh	57.60	38.61	443/12.5 Kg
Germany	114	103.3	-
U.K	111.4	114.79	-
USA	51.87	51.87	-

India still has the lowest diesel and LPG prices in the region, while the highest petrol prices are the highest. Petrol prices in India are 15 – 23% higher compared to our neighbours, having said that we should also look at the impact of subsidised prices on their economies. All three neighbouring countries are running virtually on international aid money. The local currency is weak. International donors like IMF (International Monetary Fund) and others are putting pressure to reduce the subsidy burden in order to receive further aid money. There have been recent hikes in fuel prices in order to placate the donors. Pakistan has an erratic supply of fuel despite low prices and natural gas which is abundant in Baluchistan is sold at a price of Rs. 53, while it is sold at Rs. 38.35 in Delhi.

Subsidies might ease the burden on our pockets but in the longer run will ruin the economy. India needs large scale reforms, which includes elimination of subsidies. While it is fun to be treated as subsidy darlings, it is in our long term interest as a country to pay the market prices and use the resources judiciously.

All prices quoted in Rs are in Indian Rupee and converted as per prevailing rates of 4-10-12 (xe.com)