How high Real Interest Rates can trip Modi in 2019

this artcile of mine has appeared in Financial express today (29/sept, 2017). Link below.

http://www.financialexpress.com/opinion/here-is-what-can-trip-narendra-modi-in-general-elections-2019/875051/

Unedited Version:

RBI’s Interest Rates can trip Modi in 2019

V Kumaraswamy 

Ask any shop keeper, or the lonely looking private security guards, unemployed youth in urban slums or interior towns, or the taxi drivers as to what their main issue today is and pat comes the reply: be rozgari

Not many expected Vajpayee to lose 2004 with the groundswell of national passion over Kargil, Golden Quadrilateral, relative peace and quiet in domestic scenario, great government finances and the political networking he cultivated.  Yet he lost.

The voter at the booth is not going to be thankful for how much wholesale corruption has come down (retail is still alive and throbbing), degree of digitisation India has achieved, how benign inflation is, etc. These are at best hygiene factors which can easily be washed away if joblessness persists. Without a job, a stable one at that, he can’t proposer.

High Manufacturing Real Interest Rates (RIRs).

If more people have to be converted from being losers during the on-going reforms to gainers, we need rapid job creation. Services sector (IT, BPOs, Call Centres, and Telecom) created jobs by the buckets till about 2011-12 but have reached stagnation now and have even started becoming uncompetitive now threatening imminent job losses.  Agri sector is just incapable of creating further jobs; rather it would release lots that need to be absorbed.

Employment should come from only manufacturing and here is where the real interest rates facing Indian industry is proving an insurmountable barrier not just a hurdle. The accompanying chart compares the Real Interest Rates (RIRs) between China and RIRs facing Indian manufacturing.  Manufacturing RIRs are  derived by deducting manufacturing inflation from the nominal interests facing manufacturing sector. For the last over a decade Indian Mfg RIR is about 7.21% versus China’s 2.92% – (i.e 4.29% over China’s) a huge hole for anyone to be interested in investing in Indian manufacturing.

It is a mistake to compare the general RIR which is just 2.04% over China, the country with which we have maximum non-oil trade deficit. The General inflation is contaminated by Fuel oil, Food which have no bearing whatsoever for studying manufacturing investment competitiveness.

Why has it become important now?

Just but for one year, Indian Manufacturing RIRs have been higher than China since 1991. So why has it started affecting investment sentiments now. Starting Jan 2014, duties for imports from ASEAN has become Zero virtually (S Korea is not far behind) making India’s trade borders completely open. China (even with import duties) has cost structures lower than ASEAN for several commodities.

India’s capital account has also been steadily opening up and for practical purposes it is completely open. Even the per annum limits on debt are periodically reviewed and enhanced without even waiting for the year turns.

With open trade and capital flows one has to be more sharply competitive. Added to this is the 25-30% overall surplus capacity in Industry. Who would dare to invest with a huge handicap on interest rates and surplus capacities. It is better to source goods from China or set up facilities there and sell in India, which exports jobs.

Sources of competitiveness

As mentioned earlier, agriculture and services look spent forces as far as employment creation goes.  It rests on manufacturing to create jobs, for which it needs to be competitive, which has to come from any of the 4 factors of production or natural resource endowments (part of Land).

India has tied itself up in knots where land is concerned.  Our socialistic mindset has made a grand backdoor re-entry through LARR and a plethora of court rulings, restriction on land transfer and change in usage, etc. Any acquisition takes 5 years – far beyond the patience time for an entrepreneur to keeping waiting with his ideas.  India has 375 people per sqkm where China has 142 (2015), increasing the pressure on land. So land as a source of competitive strength is ruled out.

Labour can be a source of strength given the wage levels now. But for that to happen we need to repurpose our education. Instead of (or perhaps alongwith)  BE(Mechanical) and B Tech (Chemical) we need 8th Std (textile printing), 10th std (BPO assistant), 12th std (Source coders), etc. i.e. fit for purpose specialisation kicking in at far younger ages. This can perhaps reduce capital invested for turning an unemployed into productive force as well supply the skills that would increase productivity. Such increased productivity can make the labour cheap per output unit.

That leaves Interest rates. Even enterprise is a function of interest rates beyond a point, where it translates entrepreneurism into investments. With excess capacities and high RIRs in Manufacturing, no one will feel tempted to invest in India.

High real interest rates (when the whole of rest of world is underperforming) and an increasingly politically stable India is attracting excess of $s, that cannot be absorbed by a stalling investment economy. Oversupply / unutilised $s in the forex market causes its prices to decrease. With it, it brings down import prices and makes our exports un-remunerative. This causes imports to flare up. Sure we are also gaining in petrol, prices of Chinese goods, goods from ASEAN, etc. But then the jobs in making them is happening overseas. What’s more important now  – employment or lower inflation? People who are gloating at low inflation are looking at just one side of the equation

In the last 6-7 years our Monetary economists have been failing their equilibrium mathematics exams, with their highly out of context imported monetary theories. But the political student to be detained may be Modi’s Government in 2019.

(The writer is the Author of Making Growth Happen in India (Sage Publications))

 

 

 

 

 

 

 

 

Myanmar Post

This is the first tree  (me with the tree) we planted in Myanmar in Jul 2015. The growth seems as good as the best in India – done on soil and with Tribals as virgin as God created them. A few lessons on the way.

1         The steel frame of bureaucracy may not be a British invention after all. The tribal societies seems to have as rigid a pecking order and rules and regulation and protocols within their small local communities of may be 40 or 10 families. Who takes the call at the community level and family level are well established and you bypass them at your own peril. How you initiate any communication and how it percolates are matters for curious study.

2         For those who have never seen much (or any) money in their lives beyond some basic food and shelter, one would have thought they would be keen to get some to secure their future. But they seem hardly to care. They just walk away from you at the slightest of pretexts; if they dont like something they just walk never to be contactable again – not even to collect their back period wages perhaps. Greed and a sense of security i thought were instincts. They seemed to assume that they will continue to survive the way they have. Savings and security does not seem to be established as even a ‘need’ with them.

3         If 1 X 1 X 1 = 1 what is 2X2X2? It is 2 for them. It might take you 3-4 months to convince them but it is more a matter of negotiation. When we had to dig pits and downsized the requirements from 2X2X2 feet to 1X1X1, wages were initially allowed to fall only by ½.

4         Communicating with them is an art and science of patience. Anger does no good. Communication is more than just about language and tongue. Facial expressions, tones, body language, respecting the hierarchy and pecking order and their esteem, patience… a whole range of things come into play, if you want to get anything done. Language and tongue become just delivery boys.

5         Indians might appear to be the most impatient and rude to them. quiet often you find them drifting away for finding us too rude. When an Indian knows something thats the matter of discussion in a meeting he just cant keep it with himself. He has to share/ impose it on the larger group. Sometimes it is a point of order even if contextually irrelevant, and if the Indian is too junior, it will take the form of an innocent question (actually an answer/prescription masquerading as a question).

Toilets

Toilets are a must, although in most cases it is some 50-100 feet away of vegetation from the hutment made of wood, which look solid. With snakes (ubiqutous), occasional porcupines and foxes and elephants … but they dont seem to worry too much.

Foot Volleyball – Buddhist Oneness (?) Vs Individualism

Most of them (as indeed in many parts of East Asia) play foot volleyball with a ball wowen of bamboo strips. Just foot and head used. Its a passion with them. Their skill levels and body fitness is amazing. Banana kicks to send the ball over the net or place them seem superior to World Cup footballers. And they do it even on concrete or metalled roads though usually on soil or grass field. I took the video of people playing near a toll gate on tarred surface and returned to my car.

I started admiring their skill, physical fitness and their courage (or stupidity) – a wrong landing and they might break their bones. But my host at the wheel said in a complianing tone: ‘but this is not the way it was played before. We all used to stand in a circle – young and old and the aim was to keep the ball up for as long as possible – longer than the last time, previous day, ever, etc. We had a lot more fun that way. Even today many of the interior areas or even the inner streets of here, you can see that’. His tone didn’t leave me in doubt that he longed for. ‘May be from about last 10-15 years they put a net in between and the fun element is gone’ May be this was what was cooking in his mind.

(these are my words). By creating this division they created competitive spirit instead of the oneness and team spirit. So one team (losing) had to go back home with a grumpy face and ruminate overnight or till they played next time on what might have been, copius well-spring of self examination and criticism etc. And another set walking home with a smile on their face instead of everyone walking home with a smile on their face. The oneness embodied by Budhism’s symbol replaced by Western individualism making at least one half unhappy.

But i did greatly admire the skill levels promoted by the net in between. I wonder if the very precise kicking over the net and placement would have happened without the net.

East Vs West

I have heard it from several people as gratuitous advice – that the Morning Sun is good for health and that Evening Sun is harmful. I have never appreciated the logic when the Sun is the same. Nobody has demonstrated it to me. There was a coffee plantation nearby where we made a short stop on two gentle slopes one side facing the East and another West and a road between. The plants on the side facing East looked 2-3 times as well grown and looked far more healthier than the ones facing the West. The planter explained that the Morning Sun is more of infra red rays and on balance more beneficial for plant health and the evening Sun has more of Ultra Violet rays which on balance is more harmful and one could see its demonstration right in front.

That’s commitment

Our Local partner (YA) is well known to our embassy staff in Myanmar who uses him to fix appointments with local businessmen, business assn. meetings for visiting dignitaries, arrange for functions in the embassy, etc. He is known to a few of our envoys in the region.

Sometime back our Ambassador in Singapore had called him and said that there was a leading Tamilian film producer (K for short) (whose wife was a leading actress) who is interested in investing $5 – $ 10 million in a Myanmar based story and that he would like YA to help Director K in his proposed visit to Myanmar.

YA: I was puzzled on what exactly was the help needed but Ambassadors request are generally treated as orders and we simply do what is requested.

‘I took K one night to the Night club below Hotel PR (actually a pick up joint) and he wanted to see a decent one. I took him to Fuse a well-known dance Bar where couples can jive to live music. I had known the owner and he had permitted us to be there 2 males.

‘We spotted a lovely looking single young lady about 20 yrs age cute and beautiful. It was clear after sometime she was alone and we struck a conversation with her. I inquired about her and how come single in there. This is what she related.

“I sometimes give company  to some people and do some odd work for the club in reciprocation…. go to tailoring and fashion stitching class during the day and the nights I spend here and some other clubs.

YA/K : But isn’t it too much work. how are u managing the load?

Girl: Oh yeah no … I make some $ 2000 to$ 2500 from per month from these and is very essential for me.

YA: Vow … that’s an awful lot of money – do you really need to work so hard?

Girl: I lost my father and have to spend $ 1000-1200 on my mother’s cancer treatment every month.  … when her cancer was detected I sold my virginity for $ 3000 to finance her operation and first level treatments. But the treatment is on-going and i have to continue with odd nights out and some soft nights in clubs like this to make ends meet.

YA: What do you plan to do with your fashion design lessons?

Girl: Oh that’s my passion and life dream. I will set up a fashion store first and later become a fashion designer myself.

YA: No marriage then?.

Girl: Of course I will marry – once my mother is through with her illness and my younger sister (whose education I am financing) is settled education wise. But before marriage i want to set up the store and stabilise my income at decent levels independently.

YA comments: There was fire in her voice and dreams and clear cut plan and a sense of determination about her responsibilities. We were taken by surprise about these in her given our general perception about people in similar profession, whom we tend to take lightly or even derisively. There was definitely a lesson for me that night. Its too condescending to say ‘wrong ways for a right cause’

If that’s the choice that a democratic laisse faire system has presented to her and she has had the freedom to choose, what can be our problem.

I admire her sense of duty and leadership to her family and the clear cut plan she has laid out for her life. I am sure she would do something great with her life.

I do not know whether this story interested Dir K.

The Smiling Traffic Cop

Delhi has had a dancing Cop and Myanmar has a national icon in the Smiling Cop who has featured in the front pages of New York Times for his adorable ways in his work – always similing, in directing the traffic, in resolving jams, catching people violating rules, educating them while reprimanding them but forever keeping his smile. Lots of foreigners offer him tips and take photos with him and he has been allowed by Government to take it tax free, which i learnt he contributes to charity. He has brought enormous respect for his profession and the often unappreciated tribe called the Traffic Cop.

The Truth about the Trouble in Rohingyas

 

This is about the international reports on Rohingyas problem in Myanmar.

Recent Reports seems to have got it as wrong as it can. Unfortunately reports in St Times or Bangkok posts seem a lot worse than one sided. I can sense that the reporters may not have moved an inch from their desk in filing their reports. The BP reporter wd hv had a tough time filling in the words for the 2nd half of his/her report.

Spoke to a Muslim (he is not one of the displaced or a Rohingya; he has lived 68 yrs since birth in the adjoining district) about the problem. Based on his version and local news versions … this is what seems to have happened.

ARSA is the terrorist group fighting for Rohingyas. Normally their fight is with the army. But this time they killed 4-6 Hindus, an equal number of Buddhists and attacked the local police posts. Hindus have had to keep quiet. Burmese Buddhists have no way of tracing the terrorists and have got into pitched battles with Rohingyas in retaliation. Local Police is bitten and you know where their sympathies would be.  Totally about 20 people may have died according to him.

The police has set up many check posts to curb infiltration all over the adjoining districts/states.  Some 13000 -odd Rohingyas have got displaced. but about 4600 Buddhists families have also been displaced and their monasteries are sheltering them.

The Government y’day arranged a trip for the media, whosoever cared -international and local – to the affected areas so that they can report facts. But you know the media and their opinion – they always run away when asked to prove their manhood. Lets see what comes out.

There is also inter govt conference against Fake news in Japan. Its high time the fake news, motivated news, and one sided news are put paid to. Its also time that they stop excessive interference with democratically elected govt beyond a point – they want to set the agenda without responsibility, report without verification.

There may be truth in outside media reports – but why are they afraid to present truth from both sides.