Decoding the P&L, Balance Sheet and Cashflows of India

The new finance minister is due to present his first budget shortly and here are some thoughts:

• India still follows cash based accounting system when it comes to national accounts. Any student of finance 101 will be able to highlight the multiple issues it brings and why accrual based accounting (followed by almost all the corporates) is better suited to present the true health of the economy.
• Our statement of accounts treats every cash outflow as an expense irrespective of whether it is recurring expense for running the nation such as salary of bureaucrats or it is an outflow for asset building such as creation of infrastructure assets.
• Current representation of the statement of accounts of the nation does not represent a complete story because we do not fully know the drivers of deficit whether it is subsidies, funding of losses of ailing PSUs like Air India or building of bullet trains and interlinking of rivers for the nation (hopefully, these will happen soon).

Given the strong focus on infrastructure creation of the new government, I wish they would highlight the asset build up being undertaken by the country through differentiation between capital investment and expenses.

One needs to think of the nation as a really big corporate being run from an extremely long term perspective where all its citizens are equal shareholders. In order to create long term assets (Howrah bridge still serves the purpose of providing strong connectivity, so is Mullaperiyar dam) for the nation, one should not be treating them as an expense and stifling them for cash rather one should be willing to mobilize long term debt funds for the same (just like the age old asset liability matching principle).

I think the country should borrow heavily primarily by channelizing the domestic savings through proper incentives (long term tax free bonds is a good idea and may be continued) and deploy it efficiently in building the national infrastructure.

Clearly, the country needs to work towards long term sustainable increase in GDP which is a combination of two things - capital deployment and labour efficiency. Hence, two key objectives for this government have to be infrastructure creation and skill development among masses. 

Mega projects and star institutes hog all the limelight but I think a distributed model suits our country the best. We need to create better schools and colleges in every village and well-lit roads from every field to every mandi - हर किसान भाई की फसल को पूरा दाम मिले और सही समय पर मिले, उसके बाजार में मिले और इसके लिए किसी सरकारी बाबू या दलाल की जरुरत ना पड़े 

Why should the government be in the business of food procurement and food supplies? We should enable every farmer to rightly extract the price from the market and enable every mouth to earn its food through its hands.

Achche Din....