How do the economists look at the financial decisions taken by institutions and persons. Read on for an interesting story and form your own opinion.
The Comptroller and Auditor General (CAG) of India has submitted his report on allotment of coal mines by UPA 1 especially when the PM was incharge of the coal ministry. The notional losses on this coalgate scam are estimated to be around Rs 1.86 lakh crore to the exchequer. Coming on the heels of the 2G scam of Rs 1.76 lakh crore it is a bigger scam.
Are these figures a true indication of the losses is what many persons are wondering. Is the decision making style in the government so lop sided that no one either in the government or in the beauracracy or in the political parties is able to point out that a wrong and financially disasterous decision is about to be taken. After the CAG presents its report, usually many years after the event , all hell becomes lose. Naturally the opposition does the greatest shouting and the ruling party finds it difficult to handle.
The economists always look at financial decisions in a different way. According to them all financial decisions result in lossses. Every report they will present will always show how wrong the already taken financial decisions are and they can also compute the loss figures.
Let us highlight this with an hypothetical example. A person is very happy when he builds a house for Rs 50 lakhs for himself and family. But the economist tells him that he has taken a financially wrong decision. How? The Rs 50 lakhs he could have kept in a FD in a bank and earned @ 10% an income of Rs 5 lakhs per annum. By staying in the house he is foregoing a rent of say Rs 40,000 per month or say another Rs 5 lakhs per annum. Thus he is incurring a loss of Rs 10 lakhs per year and has Rs 50 lakhs blocked in a house which is going to depreciate in value every year.
The economist will recommend that he should stay in a rented house at the cheapest locality and the Rs 50 lakhs can be kept in an FD earning interest.
The person agrees to sell his house, say at Rs 60 lakhs and goes to stay in a house in a lower class locality at a rent of say Rs 25000 per month or Rs 3 lakhs per year. He thus feels happy that he is now earning an interest income of Rs 6 lakhs per year and after paying a annual rent of Rs 3 lakhs his net earning is plus Rs 3 lakhs. However the economist finds fault with this financial decision also.
According to the economist, the person sold his house for Rs 70 lakhs within one year of building it, a return of 40 % whereas he has now put the sum in a FD at 10% thus his loss is Rs 14 lakhs per year. Also the property is supposed to escalate at 40 % in the years to come. So annual loss will now be to the tune of Rs 20 lakhs on his investment of Rs 50 lakhs. Thus the Rs 50 lakh investment @ 40% escalation per year would after 10 years be valued at 50x1.4^10 ie at Rs 1,446 lakhs. So one can imagine the losses the person has notionally incurred by taking wrong decisions, even after adjusting for annual return on his FD.
Persons opposed to him will naturally criticize him for repeatedly taking wrong decisions. The poor decision taker will not know how to handle the situation.
So let us see how the government will face the oppositions onslaught in the days to come.