Tag Archive: GDP

“Tsamina mina eh eh

Waka waka eh eh

Tsamina mina zangalewa

Anwa aa

This time for Africa”

The soccer fever had gripped the world way before the world cup had even started. It all started with “Wavin’ Flag” followed by “Waka Waka” and the countless creative commercials. The world was eager and also maybe a little apprehensive about how South Africa will pull off hosting its first ever World Cup, being the first African country to be given that honour. It was the first time ever that an African country has come under spotlight to showcase its talent as Africa was always branded as a dark continent. The world cup has its own pros and cons on its hosts – South Africa.

As outlined in Deloitte’s paper “2010 FIFA World Cup. A turning point for South Africa,” South Africa is reaping the rewards of hosting the Cup, including infrastructure improvements, an economic boost, and an increase of national pride. The need to move tens of thousands of fans, teams, and accompanying support personnel rapidly from one place to another prioritized the strengthening of South Africa’s transportation system. The country completed much of the first section of its new high speed Gautrain passenger railway and added bus lines. Highways were upgraded and the city of Durban was able to finish the country’s first new green field airport in five decades. These infrastructure projects have increased employment opportunities and provided workers long-term skills and training.

This event helped to increase their employment percentage atleast temporarily during the ongoing global financial crisis. And also South Africa being a coal- dependent economy has taken several additional measures to nullify the negative effects on environment with the host cities undertaking large scale tree plantation projects.

Quoting the finance minister of South Africa, Pavin Gordhan -“This infrastructure we have built is not short-term infrastructure that you build today and destroy tomorrow. We have increased the productivity of the people of South Africa, and all of that is part of our development and long-term planning for our country. Today, we have earned the reputation of a country that can actually deliver, and that is good for future growth,” adding that the event had helped to bring an end to the Afro-pessimism that had dominated foreign media for years.

An estimated 130 000 jobs, most of them leading up to the World Cup, were created in the construction, roads and transport and hospitality industry. It has been estimated that 373,000 foreign tourists will visit South Africa during the World Cup, each spending an estimated R30,200 on average per trip. .But the exact number is yet to be calculated since many are expected to turn up for the Grand Finale.The government expects to cover most of its expenses through the income from ticket sales and the tourism sector. The South Africa’s real gross domestic product (GDP) is expected to rise by 0.4 percent. There has also been a significant increase in foreign investors.

But experts argue that all in not well for SA whose fiscal deficit has been pushed to 6.7 percent of its GDP in 2009/10 due the World Cup’s expenses. General government borrowing increased to 184.3 billion rand in 2009/10 from 40.2 billion in 2008/09. The SA government has spent about 40 billion rand ($5.17 billion) since 2006/07 on World Cup-related projects, with 11.7 billion going towards revamping of stadiums and 13.2 billion on transport infrastructure.

The Treasury’s expenditure excluded money spent sprucing up airports. Airport Company South Africa has spent about 17 billion rand since 2006 upgrading airports in Cape Town and Johannesburg and building a new one in Durban. The spending also does not include the 25 billion rand spent on building the country’s Gautrain rapid rail network. Depending on cash subsidies, South Africa has built five world-class stadiums, renovated two existing football stadiums and also three rugby stadiums and other infrastructural changes all at a cost in excess of 30 billion South African rand, double what was predicted in 2006.

The economic benefits to the South African’s are also scarce.  Because of the sky high prices of the tickets very few Africans have been able to afford it. With less than 10 percent of its people having access to internet and the tickets being sold online initially the low turnout of natives was inevitable. FIFA stated that it’s the first time ever that the host country’s representation is so low for the matches. Besides this, the small businesses and local industries have suffered a massive blow. Local traders have been barred from selling food, beverages, and soccer merchandise outside the stadiums. Local factories were not even awarded the contract to produce the official mascot, Zakumi — instead, the work went to a factory in Shanghai.

The much touted, “trickle down benefits” to ordinary South Africans have simply not materialized. Additionally, the enforced “cleaning up” of urban areas has mainly targeted the homeless and poor, something which is in direct contradiction to the promise of more inclusive urban planning, housing provision and living space. The costs of the 2010 World cup stadia and related infrastructure, borne by the South African taxpayer, have increased from an initial amount of R2.3 billion in 2004 to a whopping R17.4 billion presently, representing a 757% increase. Also creating a “tax – free bubble” around FIFA has been a blow to the South Africa’s revenues.

The Gini Coefficient of income inequality also indicates the high levels of poverty in this country. This coefficient, a metric on a zero-to-one scale with higher numbers representing greater disparity, has risen from 0.66 in 1993 to 0.70 in 2008 (the U.S., for comparison, is at 0.45). Racial apartheid has been replaced by class apartheid and unemployment hovers around 40%.The much needed funds for the public projects had been diverted to this event which will generate significant revenues. But the major chunk of profits will be going into FIFA’s pockets and the big corporations while the leftovers are expected to cover South Africa’s huge expenses. The 2010 World Cup is already proving lucrative for FIFA —Jerome Valcke, the organization’s secretary general, recently announced that income has increased by 50% since the last event.  FIFA is already boasting about record earnings of $2 billion in contrast to the losses incurred by the host country. Financially, it’s a great deal for FIFA, as virtually all of its revenue is contracted in advance via the sale of television and marketing rights, while South Africa has to foot the enormous bill for infrastructure improvements.

Though South Africa by hosting a spectacular World Cup has earned the good – will of many countries along with the trust and confidence of its people, its huge expenses have surpassed its earnings. Majority of the losses incurred due to its poor infrastructural facilities compared to the previous host countries coupled with price rise due to the global financial crisis. But the infrastructure developed will be permanent and will help in future growth of the economy. In the long term the positive effects might override the losses.

-Radha Krotthapalli

Imagine the Indian rupee having the status of a global currency. This might seem more of a fantasy and less of reality. But this was the picture of the Rupee some 50 years ago. However, the two major financial crises in 1966 and 1991 led to the consequent devaluation of the rupee. In the present scenario, it is no secret that India is achieving robust growth with an average increase of about 9% in its GDP every year. This might lead to the belief that the Rupee must also have been making significant progress. However the reality is quite contrary. It’s astonishing to know that the reason behind this is the Indian government itself. Had the government not interfered, the rupee would have been soaring high as expected. What forced the government and the RBI to suppress the growth of the rupee? Let us see the reasons behind the government’s bizarre actions.

Since the last few years the government has been doing its part to keep the Indian rupee in a low profile. In plain words the Indian government has been preventing it from gaining strength against other currencies especially the U.S. dollar. This is done in order to protect the Indian exporters particularly the IT sector followed by the jewellery and the textile sectors. Since these sectors are the major players in our economy, the government and RBI are keen to control the growth of the Indian rupee. The role of the apex bank is significant in this regard. Stronger rupee will be a severe blow to all the exporting firms. And there is the example of how China spread its goods across the world through the cheap Renminbi.

Several counter arguments have been raised stating that “A strong rupee does not imply weak imports”. The best example to this statement is that of Japan and Germany. During the 70s and 80s, Japan made remarkable progress in its global exports trade while simultaneously Yen gained significantly against the Dollar. High production technology and good quality has been a characteristic of the Japanese goods. Even Germany has been the world’s largest exporter of hi- tech goods despite its strong currency. This feature is however absent in the Chinese goods. It’s disturbing to note that even Indian goods lack this feature. As the rupee gains, the IT sector will be affected to a drastic level as most of the outsourcing jobs by the U.S. are driven by the weak rupee. However, it’s inevitable that for the future growth of any sector, new technology and better quality is the key.

A strong rupee can actually be the solution to this problem when viewed from a different perspective. For one, it would bring down the cost of technology – mainly the capital equipment and raw materials which in turn can produce better exports. This would revolutionize the manufacturing sector in India. But some losses cannot be avoided i.e. those who fail to make a transition from mere cost-arbitrage to a competitiveness driven by technology and quality. However the major firms in the exporting sector will be able to make the transition. The strong belief for this comes from the fact that the people and companies from this country are involved in development of high technology all over the world. It is just an artificially cheap rupee that prevents them from doing the same in their homeland.

Of course, there are several additional benefits to reap from the strong rupee. It will reduce the inflation through cheaper imports of several commodities particularly oil. The Indian government will also be able to issue rupee denominated bonds to foreign investors for infrastructure projects which will in turn help the rupee to regain its lost glory. Half a century ago it was a key currency for trade, spreading from UAE in west to Hong Kong and Malaysia in the east. The rupee was quite strong then, 4.75 to the U.S. dollar compared to the high 40s now.

The government has announced a unique symbol for the rupee (read here). This might mark an end to the era where it tries to erode the strength of the rupee. “Strong symbol implies strong substance”. This should be the future of the Indian rupee.

– Radha Krotthapalli

Fiscal Deficit

Fiscal deficit in plain and simple term is the difference between the ever increasing expenditure and small income. Fiscal deficit is the total expenditure (capital and revenue) minus the total income of the government. In a developing country like ours we cannot aim for a utopian situation of zero fiscal deficits but the least we could do was to have a deficit with constitutes more of capital expenditure. Fiscal deficit is measured as a percentage of GDP and for India it stands at a not so pleasant figure. Let’s make the things direct and less of economic mess.

Suppose you have 100 bucks as income and 150 bucks as total expenditure you want to do. For spending 150 bucks you need to raise additional resources like borrowing from friend (if he is that generous after all). Now Rs. 50 will be your fiscal deficit.

Now as always, the devil lies in the details. The problem here is whether you are going to spend the 50 rupees as a onetime expenditure for buying a bike or is it a recurring expenditure like treating your girlfriend. The next month, supposing your income remains flat and you need more money as you are again not able to make ends meet, your friend shows true spirit of altruism and friendship and is providing you “loans” without asking for the principal amount immediately and just demands the interest. Now as it is you are in need of more money and add to that the interest liabilities.

The problems get compounded. You now start curtailing on the capital part (i.e. creating new assets.. no bike modifications !!!). Your new loans are just for running the system (petrol got heck lot expensive dude!).. A scenario is reached when the interest payment by you requires loans from him. And this is the situation when things have got messed up.

To correlate, this is exactly the situation that India is in. We have a huge revenue deficit which is caused when you just don’t have enough money to pay for running the system. So you keep on borrowing even to pay for the interest. The government unlike you has many many friends which are in “compulsion” to provide loans. There is the RBI and banks from which government borrows vigorously and also the government has the supreme power of printing more currency. The government floats bonds – government securities on which it pays interest and these securities are completely risk free (you got to trust them!).

The other form of financing the deficit – deficit financing by printing money has even more damaging results. If the government prints money to finance the deficit and production does not increase immediately, this leads to increased inflation as more money in the economy chases the same amount of goods. This is generally why fiscal deficit is seen as not being good for the economy. Classic example of this is shown by Robert Mugabe led Zimbabwe where inflation is hitting… hold your breath… 300,000%! This shows how rampant printing of currency by government defying all logic can do “wonders” with the economy.

Now in order to contain the draconian devil, the government living up to its reputation of making things too tedious came out with an act – Fiscal Responsibility and Budget Management Act (FRBMA) which mandates the government to reduce the fiscal deficit by at least 0.3 % every year and wipe out revenue deficit – difference between the revenue expenditure and the recurring income by march ‟09. In order to meet these strict guidelines the government took help of some innovative techniques; showing the vastly increasing oil bonds and fertilizer subsidies as an off budget expenditure so as to not include it into the deficit and now it claims that it is going on the target to meet its commitments as mandated by the act…!!

The solution lies in government working more to take subsidized fuel away from someone who is driving imported SUV and not on devising nefarious ways to hide facts from the people.

Savil Gupta

BITS – Pilani