Some observations on ADB study on poverty impact of food-price inflation

An Asian Development Bank (ADB) study, Global Food Price Inflation and Developing Asia, says a 10-percent rise in domestic food prices, ceteris paribus, could push an additional 0.55 million people in Nepal below the poverty line of US$1.25 a day (based on 2005 purchasing power parity), or increase the poverty incidence (percentage of people living below the poverty line) by 2 percentage points. Using the POVCAL database of the World Bank, the study finds that the poverty impact of food-price inflation is the highest in rural India (2.9 percentage points for a 10-percent rise in domestic food prices). While the impact is 2.1 percentage points for urban India, the lowest impact is estimated for Sri Lanka, at 1.2 percentage points. The figures for Bangladesh, Pakistan, Nepal and Bhutan are, respectively, 2.5, 2.2, 2 and 1.8 percentage points. It is noteworthy that despite having more or less the same growth rates, the impact of a 10-percent rise in domestic food prices is lower in China (2.2 percentage points in rural China and 0.2 percentage points in urban China) than in India. The difference is particularly marked when one compares urban China with urban India.

Here are some observations on the study, mainly with regard to the estimates for Nepal.

1.       According to the inflation estimates of Nepal Rastra Bank, the year-on-year food inflation, as measured by the food and beverage component of the National Consumer Price Index, was 17.3 percent in mid-March 2011. Going by the estimates of the ADB study, this would suggest that during the one-year period to mid-March 2011, more than 0.55 million people were pushed into poverty due to rising food prices. But one cannot say so for sure because the price index (or any of its components) is an "average" concept and may not capture the prices faced by the poor or those just above the poverty line and vulnerable to relapse into poverty.

2.       As the study says its estimates are based on the "latest POVCAL database", and the most recent household survey, required to estimate the poverty incidence, is the 2003/04 Nepal Living Standards Survey II (as is used at http://iresearch.worldbank.org/PovcalNet/povcalSvy.html), it appears that the ADB study based its simulation of the impact of food-price inflation on NLSS II. To the extent the headcount poverty incidence has declined since 2003/04, the impact of food-price inflation may well be higher than what has been estimated, unless those who have climbed out of poverty in this period have increased their incomes so much that a 10-percent increase in food prices cannot push them back into poverty (but there is no a priori reason to assume this to be the case). Although this may sound contradictory at first blush, the reason is simple: as more people come out of poverty (a reduction in poverty incidence), some (or most) of them will join those living just above the poverty line, and when there is a rise in food prices, all those living at a certain margin just above the poverty line will be thrown back below the poverty line – with the result that the increase in poverty incidence will be higher than if there had not been a decline in the incidence earlier.

3.       The study does not report the change in poverty gap ratio (which measures how far below the poverty line is the average poor person/household) for Nepal due to a rise in food prices. This would have given an idea of how more poor the poor would be due to food-price inflation.

4.       The study appears to assume the impact of food-price inflation on the poverty incidence is almost linear, that is, if food-price inflation doubles, the impact on poverty also doubles. This is evident from the estimates of poverty impacts in the alternative scenarios of 20- and 30-percent food-price increases, which happen to be double and treble, respectively, of the estimates for a 10-percent increase in food prices – in all 25 developing countries in the sample. Thus, if 0.55 million people are estimated to be pushed into poverty by a 10-percent increase in food prices in Nepal, the number doubles to 1.1 million for a 20-percent inflation and trebles to 1.65 million for a 30-percent inflation. While the possibility of people above the poverty line in Nepal being distributed in such symmetry as to yield such linearity is there (this scribe does not know what the actual distribution looks like), it is doubtful that this is the case with all the 25 countries. Hence, the linearity of impact is likely to be the result of the specification of the model employed by the study. In reality, it may be the case that as food-prices increase, the poverty incidence (the headcount ratio) increases but non-linearly, probably at a decreasing rate up to a certain point.

5.       The ADB study considers the US$1.25-a-day, or international, poverty line. Using the NLSS II data and the US$1.25-a-day poverty line (or about Rs 27 per day using the PPP exchange rate of 2005), the World Bank estimates headcount poverty ratio at 55.12 percent for 2003/04. The poverty rate using the same data but considering the national poverty line (Rs 7695.7 per year, or about Rs 21 per day at 2003/04 prices) is 31 percent for 2003/04. There is thus a difference of 24 percentage points in poverty incidence using the two different poverty lines. This means that an estimation of the poverty impact of food-price inflation using the national poverty line (which is less stringent than the international poverty line, though) may show an even greater number of people being pushed into poverty by food-price inflation. The impact of food-price inflation on the poverty gap ratio would have been illuminating.

   

On defeat of communists in India assembly polls and supposed implications for Nepal

The trouncing of the Communist Party of India (Marxist) in West Bengal's assembly elections, ending a 34-year uninterrupted communist rule, has been interpreted by some "analysts" here in Nepal as carrying important implications for Nepal's left parties and their economic policies, with some suggesting that Nepali communist parties must shape up or ship out. Their main argument is that the Communist Party, in its long reign, could not deliver economic growth and was therefore punished in the hustings. This scribe, while no apologist for any political ideology or party unlike many a writer in the Nepali media, finds such inferences highly contrived and overblown, in some instances even born of the writers' political prejudices that blind them to the differing contexts in India and Nepal.

1.       Glaringly missing from such analyses is why even as the voting public apparently got sick and tired of CPI (M) misrule, a Maoist insurgency is raging in different parts of India, including in West Bengal, covering 40 percent of India's villages. An insurgency that the Indian prime minister Man Mohan Singh described as the greatest challenge to India from within. If the rejoinder is that the Maoists there do not enjoy the support of the people and do not have anything to offer for a positive transformation of the Indian state/economy, then the same could be said of Nepal's Maoists when they too were waging their "people's war" against the Nepali state. But that would be at serious odds with the fact that the key political features of New Nepal were essentially Maoist agendas, good or bad. Nepal's Maoists emerged as the largest party in the Constituent Assembly (CA) elections vetted as being largely free and fair by the international community, including western democracies. Of course, just because western democracies said the elections were fair it does not mean that the election were actually fair, but if the analysts do not think the elections were fair, then they should have the guts to chastise the members of the international community that suggested otherwise.

2.       Paradoxically, CPI (Marxist) is the very party whose leaders were chummy with Nepali Maoist leaders who self-avowedly spent most of the insurgency years on Indian soil, in and on the outskirts of New Delhi, and who ostensibly persuaded Nepali Maoists to rejoin multiparty politics. They were hailed in the mainstream media for helping end the armed conflict in Nepal. The analysts do not deem it relevant to enquire why the CPI (Marxist) leaders cannot achieve the same in their own beloved homeland, the world's largest electoral democracy – why can't they propose that Indian Maoists be brought into mainstream politics, even if it means conceding  to some of the Maoists' demands, expanding the Lok Sabha liberally to accommodate the Maoists, and then instituting reforms to the Indian political and economic systems by incorporating the Maoists' demands – a la Nepal? Why, instead, the CPI (Marxist) government in West Bengal was cracking down on Indian Maoists? Why such bonhomie with Nepali Maoists and animosity with their compatriot Maoists?

3.       The suggestion for mainstreaming made above won't work there? But it is working here in Nepal, right? No? Then say so loud and clear. 

4.       The fact is that just as Nepal's Maoists considered the then largest mainstream communist party of Nepal (CPN-UML) a revisionist party that had deviated from communist philosophy, India's Maoists' do not consider CPI (M) as a real communist party. Indian Maoists do not consider CPI(M) to be Red enough.

5.       The analysts, who argue that CPI (M)'s core economic philosophy proved to be its undoing, ignore the fact that Mamata Banerjee, who cruised her party Trinamool-Congress to a thumping victory over the communists in West Bengal, had sided with farmers protesting the acquisition of their land for setting up a Tata plant while the ruling communist party was bent on facilitating the establishment of the plant. Which position was good for the welfare of West Bengalis is not relevant here. The point is that Mamata was doing what the communists should have been doing (but were not doing). This irony is lost on the analysts.

6.       Unlike what the analysts would have us believe, there is no significant difference in the economic policies of major political parties of Nepal, communists or otherwise. On crucial issues of national interest, they have let the nation down. All of them, for example, have pursued an export-oriented hydropower policy even as the economy reels under crippling power cuts. Politicization of the bureaucracy, rampant corruption, politico-criminal nexus, capture of government policies and decisions by vested interests, external interests calling the shots in national policymaking and decision-making and mismanagement of public enterprises have been the bane of all governments, with or without communist parties.

7.       Whether there is a communist government or a UPA government or a BJP-led NDA government at the centre in India and whether there is a communist government or a UPA government or a BJP-led NDA government or any other government in any state in India is unlikely to change basic Indian foreign policy (including its component economic policy) towards Nepal.

8.       The paradox of Nepali communist parties, even when in power, endorsing the neocolonial economic relationship between Nepal and its neighbor as exemplified by the pursuit of the policy of exporting hydroelectricity at dirt-cheap rates, and thereby exporting away potential multiplier benefits for the domestic economy from utilizing hydropower within, is likely to continue.

9.       Actually, it is not a paradox; only the operation of a principle: there is no free lunch. External benefactors naturally want their pound of flesh. 

Nepal buying overpriced fuel from Indian Oil Corporation

A report by a high-level committee led by a parliamentarian (The Report of High-Level Committee on Nepal Oil Corporation Reform, 2011) has found that Nepal Oil Corporation can reduce its losses by as much as Rs 6.40 billion (annually) by reviewing the pricing arrangement with its sole supplier, Indian Oil Corporation (IOC) and by another Rs 3.44 billion through reforms in the NOC. That losses caused by NOC being overcharged by IOC are nearly double the losses due to internal factors is a crucial piece of information for the lay public. Unfortunately, this aspect was generally either blacked out or downplayed in domestic media coverage, instead focusing only on the gains to be had from NOC reforms, which, though important, was old hat and hence no "news" at all.  Perhaps highlighting the lesser known fact would have been considered "knee-jerk anti-Indianism" – whatever that means – by domestic fifth columnists and intellectitutes, including those in the civil society domain.

IOC sets prices for NOC at import parity price instead of export price, entailing the application of Price Adjustment Factor (including Notional Custom Duty) that inflates the actual price NOC pays IOC. The burden for Nepal is twofold: first, the higher price while purchasing fuel from IOC; and second, the additional tax burden to NOC and/or Nepali consumers as VAT at the border is imposed on a higher base (resulting from the higher price charged by IOC). The report finds that purchasing fuel from IOC at import parity price rather than export price raises cost by 6.73 percent for petrol, 6.71 percent for diesel, 8.88 percent for kerosene and 4.19 percent for LPG (all at 1 April 2011 prices). The border import price is thus inflated by Rs 4.18 per litre for petrol, 4.75 per litre for diesel, 6.33 percent per litre for kerosene and 48.92 per cylinder for LPG (all at 1 April 2011 prices). This jacks up Nepal's annual import bill with respect to India by Rs 5.64 billion, or 14 percent of Nepal's merchandise exports to India in 2009/10. Adding the increased VAT burden resulting from higher base in the form of higher border import price, the total extra cost becomes Rs 4.72/litre for petrol, 5.37/litre for diesel, 7.15/litre for kerosene and 55.28 per cylinder for LPG (all at 1 April 2011 prices).

The report reveals that IOC owes NOC a staggering Rs 14 billion for the extra charges it included in its selling price from 2002 to 2011. (During that period, IOC refunded Rs 3 billion to NOC – which indicates that IOC also accepts in principle that customs duty and/or other charges it extracts while selling to NOC are NOT legitimately applicable.)  This amount was about equal to NOC's then cumulative losses. Which means that even with the rampant corruption in NOC's operations (which no doubt has to be stamped out) and the subsidy enjoyed by Nepali consumers, poor and rich alike (and of course foreign embassies and missions that have no qualms about guzzling fuel subsidized by this poor least-developed country) all these years, NOC would nevertheless be at a break-even level if only it had not been overcharged by its monopolist supplier.

Granted, NOC and ultimately our political class that is directly or indirectly responsible for NOC should have negotiated better with IOC (and by extension the Indian government). But the facts cited above do rubbish claims made by the ignorant or, perniciously, fifth columnists and intellectitutes that it is due to the benevolence of the southern neighbor that Nepal is receiving oil at the best possible price, that Nepal is better off with the current arrangement than the previous one (until 2002) under which NOC imported crude oil from other countries and handed it over to IOC for refining, paying IOC only the refining charge, and that it is futile to look for any alternative sources of fuel supply. The report, however, recommends exploring the option of importing fuel from China taking advantage of the Chinese government's plan to construct an oil pipeline linking Shigatse, Tibet. The report recommends a study on the feasibility of extending the pipeline to Nepal's Trishuli. "But that would be unfeasible" – this is likely to be the typical reaction of the ignorant, or perniciously, the fifth columnists and intellectitutes. How can you say that without conducting a study? And especially when a committee dominated by parliamentarians of NEW NEPAL and a professor and coordinator at the Energy Study Centre, Institute of Engineering, Tribhuvan University, considers it an option worth exploring.

At a time when Nepal's political parties are hell-bent on allowing choice hydropower projects to be built exclusively for export purpose even as the country reels under load shedding, without any sign of it being over in the foreseeable future, the report, commendably, emphasizes the need to utilize water resources to generate electricity for internal consumption, as a powerful means to reduce dependence on fossil fuel for commercial energy consumption, and by extension also reduce trade deficit. 90 percent of energy consumption in Nepal is for domestic/household purpose. The report states that for an average family of five, electricity is the cheapest source of energy for cooking, given the current market price of fossil fuel. The cost per month for such family is Rs 790 if it uses electricity, as opposed to Rs 930 and Rs 1150 respectively if it uses LPG and kerosene. As both LPG and kerosene are subsidized, the cost advantage of using electricity when LPG and kerosene prices are allowed to adjust to international market prices may be even higher. 

Tax fraud: names, please

Both broke the law to line their pockets. One misused public office to get rich. The others, of the private sector realm, evaded taxes to get richer. The former has been publicly shamed and is in jail, and rightly so. However, the public have been denied their right to know the identities of the latter group of swindlers and it is uncertain whether these offenders will be punished as per the law. Different strokes for different folks? Little wonder. Former Minister Chiranjivi Wagle of Nepali Congress was a political has-been anyway, whereas the tax evaders include top business houses that contribute liberally to political party kitties and may even have representation in the Constituent Assembly.

Finance Ministry mandarins would want us to thank them for spotting the evasion and being supposedly firm on their stance that the evaders pay not just the evaded amount but also fine and interest. It stretches one's imagination to think that evasion occurred on such a scale (bogus VAT transactions of at least Rs 10 billion) without the connivance of high-ranking officials; the stubborn refusal to disclose names only feeds the skepticism. The protection of taxpayers' rights by the Income Tax Act is speciously invoked in defense of the non-disclosure of names. True, Section 74 of the Act, which stipulates taxpayers' rights, provides for "right to secrecy in respect of tax matters and keep it inviolable". Granted, details of taxpayers' assets and income gained through lawful means should not be divulged. However, pointing to this right as an excuse for not disclosing the names of those who have violated the law by cheating the treasury through the submission of fake VAT bills or export documents is unacceptable. Remember, the law protects taxpayers' rights, not tax evaders', as emphasized by the very first provision in Section 74: "Tax payer shall abide by the duties in accordance with this Act." 

Grave offence

The issue is not just about failure to pay taxes fully. An even graver offence has been committed: that of "making false or misleading statements". The Act considers this offence more serious than merely not paying taxes. When false or misleading statements have been furnished "knowingly or recklessly"—as is clearly the case here—the penalty is 100 percent of the underpayment of tax. Moreover, the offence can carry a prison term of six months to two years, higher than that for the offence of failure to pay taxes (Section 124). These punishments are independent of cooperation or non-cooperation by the offenders. The argument that non-disclosure of names is part of the strategy to secure cooperation rings hollow. That the offenders can be jailed makes mincemeat of the claim that the names cannot be disclosed in deference to their right to secrecy.

Then there is this claim that nowhere in the world are tax evaders' names disclosed. This scribe leaves it to dear readers to test the veracity of this claim on their own—a minute of google search suffices. More seriously, the claim begs the question why, even in spanking new Nepal, do policymakers have to agonize over how other countries treat tax evaders, when the national law is pretty clear about it.

If the names of top taxpayers can be made public every year, why can't tax evaders' names be disclosed? Media reports have it that 16 of the firms evading taxes belong to top business houses, with the highest amount evaded by a single business house standing at Rs 650 million. One should not be surprised to find some of the top taxpayers (or their ultimate owners) annually felicitated by the government also on the list of top cheats. The scale of evasion and the deplorable means employed serve to reinforce public cynicism towards corporate social responsibility and philanthropy. If you can swindle the exchequer of hundreds of millions, what's the big deal about shelling out a couple of hundred thousand rupees for, say, disaster relief?

Is Rs 4 billion (the amount of revenue loss at last count) or for that matter Rs 650 million a big amount? No, according to those handling the state's finances. When the scam first hit the vernacular press with very limited details, a top bureaucrat, in an attempt to downplay the significance of the fraud, was quoted as saying that no one can get rich "overnight" in Nepal through tax evasion. The reason offered by the learned official was that Nepal is a “low-tax economy”! What perverse logic or pathetic naivety! Nepal’s tax rates (personal income tax, corporate income tax and VAT) may be among the lowest in South Asia and tax as a percentage of business profits here may be the lowest in the region after the Maldives. But when the authorities are not vigilant enough or deliberately look the other way, people can make a killing through tax evasion, as is now amply clear. This is something a poor country with a tax-to-GDP ratio of less than 13 percent and where revenue surplus (excess of tax and non-tax revenue over recurrent expenditure and principal repayment) finances less than 15 percent of capital expenditure can ill afford. The tax-to-GDP ratio depends upon, inter alia, tax compliance. How can it be high when evasion is rampant?

In perspective

Let’s put the worth of Rs 4 billion in proper perspective. With that amount, 25 megawatts of electricity can be generated. Rs 4 billion is nearly 40 percent of the current fiscal year's budget allocated for the Ministry of Agriculture and Cooperatives, and about 45 percent of the budget allocated for the Ministry of Irrigation. Compare Rs 4 billion with the Rs 980 million allocated for research and development in agriculture, or the Rs 2.75 billion in fertilizer subsidy that was "substantially" increased in the current budget. Rs 4 billion is 6.5 percent of the country's total merchandise exports in 2009/10 and is not an insubstantial amount for addressing some of the supply-side constraints afflicting the export sector, as identified by the Nepal Trade Integration Strategy (NTIS) 2010—for example, setting up laboratories of international standard for testing the quality of export products with high potential, such as honey, medicinal herbs and essential oils, and wool products. Compare Rs 4 billion with Rs 30 million allocated for implementation of NTIS for 2010/11. Or if Rs 4 billion is to be spent on a rural employment guarantee scheme a la India’s, 100 days of employment per year can be provided to some 266,666 people at the minimum agricultural daily wage of Rs 150—that is, to about half the annual new entrants to the labor force. 

The offenders are marshalling their political resources to get a lenient punishment. If the government fails to name and shame the offenders and punish them with the full force of the law, it will have missed a great opportunity to show that new Nepal is positively different from old Nepal in that the law is equally applicable for big shots and small fries. Failure will particularly incriminate the CPN-UML—which heads the government and holds the finance portfolio—belying its professed pragatisheel orientation.

If they really care about Nepal’s development, donor agencies that incessantly press the government to expedite "economic reforms" and reduce the "cost of tax compliance" would do well to spiritedly press for action against the tax evaders, even if their dear private sector happens to be in the dock. The civil society can do its battered credibility some good by rising above partisan interests and pressuring the government for action on a really serious issue—for once.