India is Thrivvving in the Interiors; forget the snooty and skeptical city dwellers


As i went thru the streets of this town of 70K population and drove thru the interiors, i could see the festive spirit of the independence day. Each of the 28 wards in this township had a flag hoisting ceremony, most govt establishments, hospitals, schools and some shops had their own. There were others at the street corners. People exchanging greetings, young children coming and pinning flags on your shirt, people greeting each other, loud speakers blaring speeches, national anthem, etc. On the roads one could see school children returning after assemblies, some serious holding small flags high, someone thrusting sweet into his friends mouth, making merry, greeting passersby ‘Vande Mataram’ or ‘Happy I Day’, enjoying the spirit. For the first time since mid-1960s i was seeing this kind of festive spirit about our national independence.

It was almost like the famous Tamil Song ‘ஆடுவோமே பள்ளு பாடுவோமே ஆனந்த சுதந்திரம் அடைந்துவிட்டோம்…’ kind of spirit and fervour (Lets dance; lets sing now that we have attained joyous freedom). This was on my way to the Government funded hostel /school for tribal girls in Kumaran Bheem district Telangana.

when our own ceremony was over the patron of the school asked me if i would be interested in visiting the school. We had less than 3 hours to catch the train and school is about 25 kms away. But these days most parts of India – rural or small towns – seem to promise one KM/Minute speeds and so we dared.

1 Kumaran Bheem district was part of Adilabad district and recently bifurcated and is a reserved constituency. Not so long ago – about 10 years back- the district was Naxal infested. The MLA had been gunned down right in his house inside town. and as we were driving the patron (man right of SI) pointed to other areas where there had been skirmishes and cases of vehicle burning, arson etc. But the Govt of C Naidu seem to have had some 75 encounters and gunned down many. and both his Govt and the succussor govt seem to have done a great lot of developmental work to showcase the benefits of belonging to formal systems over staying alienated. The place still has tigers roaming in the jungles and occasionally seen on the roads in summer.

2 Kumaran Bheem has the status of God in this area. He was a warrior and tribal chieftain. About 600 years ago the area was ruled by Shahs of Ballarshah (who was the maha chief), and there were several smaller kings and chieftains under his protection. These poeple belonged to the Gond tribal sect – a god fearing, hard working, and honest group. In later years the Lombardas (south indians use Lomabardi to denote a certain sense of dressing). Lombarda are Naiks who migrated from nearby Maharashtra and supposedly more intelligent and smarter and said to have climbed the social ladder faster than the original occupants. There are frequent clashes between the two. When the Shah kingdom fell there were wars with the others, then the British, then the Nizam whose army gunned down Kumaran Bheem in 1940s. Thus he attained martyredom and Godly status. (when we were getting out of school we garlanded his bust with all the temple fervour, agarbathi, garlands and camphor and no footwear allowed). (see clipping)

It appears that Naxalism is of 2 kinds – one of people who get disillusioned with the formal systems and take to arms and the other of the descent variety. People in this region who have always had to fight someone or the other right thru history protecting their land and livelihood. they fought other tribal chiefs, then British, then the Nizam and when we attained independence, the Nation took the place of the list of tormentors and they continued their ‘war’.

3 Farmer Suicides: we saw some crazy youth dancing and posing for selfies and group photos on the railway track not aware of the risks. I asked the patron about farmers suicides and the agrarian distress esp given the fact that there was an acrimonious debate on the subject a few days back in the state assembly. ‘What former suicides. Just an attempt to milk the situation. Once something happens like that, the others will make a hue and cry to take maximum advantage and get their loans written off. The fact is the govt is giving Rs 20000 loan to each farmer for each acre per crop thru Grameen Banks. I also write legal opinions and the format is so standard. If you have repaid all your previous loans it hardly takes 10 minutes.

Its those who have over-reached that fall into difficulties. there is widespread absent landlord cultivation. People who can manage 7-10 acres of lease cultivation take 50-100 acres and fail to manage or their crops fail due to want of care and unable to manage some commit suicides.

Each villager/village house unlike you and me has 3 cellphones these days. One for songs playing – usually a chinese phone it will be, one a smart phone for whatspp, social media and facebook etc. and a basic phone for talking whose battery will last for 2-3 days. and most homes have a vehicle to move around – 2 wheeler and cars in some houses. every 50 households may have a tractor and and auto per every 20-30 homes to ferry people.

4 School. The school has over 400 girl children studying upto 10 th std. Has 18 teachers. The school is well funded by the State government and is one of several such schools in the district. The government gives them 4 pair of uniforms, 2 blankets, towels, and books and stationery, sumptuous breakfast (4 different items each day), besides lunch and dinner. They are all hostellers since their parents are too poor to afford any education.

When my turn came to speak, i said something by way of reiterating sacrifices made by our forefathers and elders and asked them to be mindful that freedom comes with responsibility. But when it ended, i asked permission from the chairman and the headmaster to speak to the students (if there is something like Public Listener as opposed to Public Speaker, i would like to be a member of the club) and enquired as to what each ones ambitions are. Many Doctors, some teachers, a solitary Collector, a dancer, and a singer. You can look at the video. Each of them gave a crisp, clear and onthe spot answers – no prevarication, whataboutry or may be … this or that kind. Very clear on their goals. When i asked the ‘singer’ to sing a song, no hesitation .. sang a telugu (i presume) song  and then one more volunteered and sang Honge Kaamyaab, ek din, man me hai vishwas. I asked her to lead the chorus and she did it unhesitatingly. .

I wished i had been as clear and bold and unapologetic about myself in my younger years. I remember an older cousin of mine asking me on my future plans when i was in my final year B Com. I gave such a shameful wishy washy, gooey diffident answer like ‘ if i pass my exams may be i will try for M com in such diffident halting manner that the questioner would have wondered ‘why is this worm even existing on this earth’.

5 Pace of public works. The state has done wonders in linking up water supplies. from being a dry and draught prone area, over the last 10 years thruough a network of irrigation canals and dams water is being provided to almost all areas now. about 5-6 months ago when we were traversing the same route, we saw some planning for an irrigation canal – some markers although the road bridge had more or less been completed. But on 15th August when we went, the canal had been completed and the CM announced water connection to some 26,000 villages virtually covering all the remianing villages.

6 Hemandroff Pattas. An englishman lived and worked amongst the tribal way before Independence. he had determined that each tribal family would require about 30 acres to survive. accordingly many pattas were issued and these are even today called by his name. (not sure of spelling). Even his successor /son worked in this area and are buried here.

The confidence, bounce and the optimism and confidence of the school children was radiating. So was the festive spirit of independence day. India is thriving and will gallop along speedily and see great heights. I was taken there to enthuse and inspire them. On the contrary it was i who got inspired by them and got my faith on our democracy and development renewed on the independence day.

While on the way back i offered a decent sum to start a scholarship for the school. My patron almost instantly refused saying ‘tension math leejiye. The school is well funded by the government. there is no dearth of resource. I called you only to inspire them. all of them will remember today for a life time.’ I only wished you had spent more time and eaten with them. I (the patron) donated a block and all these were arranged in a matter of 30 minutes by the local SI, chairman of school, and headmaster’.

It seems infinitely more enthusing to belong to a colony of hopefuls however lowly (in income stakes) placed than to a colony of cynical cribbers,even if they are reservoirs of wisdom. Many city dwellers behave as if they are superior to the nation and that the nation needs them more than they need the nation. Not so the interior.

Image may contain: 8 people, including Ram Chandran, people standing, people sitting, child and outdoor
Image may contain: 7 people, including Kamal Lakhotia, people smiling, people standing

A Contrarian Monetary Policy

Indian industry has been sluggish for a fairly long time, and all our orthodox monetary policies have not been able to make it come alive, grow and deliver employment of any great proportion. Democracy does not seem to be the villain, as much as unimaginative policies. Opportunity costs for experimenting with an alternative policy are very low now, as never before.
The key cornerstones of such a policy would be as follows:

  •  No FDI/FPI or FII targets: Just maintain the rupee within -4%/+1% of REER values. This will be pre-fixed with a one-time readjustment to correct the current overvaluation.
  • No inflation targeting: Target industry/economic activity-specific interest rates based on supply gaps or potential. Debunk general purpose credit measures.
  • Switch from price-based (repo and bank rate) money volumes to volumes-based price (interest rate) discovery.
  • These monetary measures have to be garnished with two fiscal actions—bringing petroleum under the ambit of GST (28%), and aligning all export incentives with the ‘best of ASEAN’ incentive package.

Let’s see how these contrarian measures are better suited to kick-start industrial revival and help in the creation of employment. First, a recapture of changes in business behaviour especially with respect to the main policy tool, i.e. interest rates.

Interest on working capital should count as variable cash costs (marginal cost to economists). An increase across the board for all players would only push up the supply curve and result in inflated prices—quite contrary to the effect desired. In any case, due to advances in communication, payment systems, ‘as and when needed door delivered’ systems, optimisation algorithms in stock keeping, etc, businesses are working with a lot less working capital and some enterprises even on negative working capital.

The ability of long-term interest rates to influence investment decisions is fast dwindling over time. Most of the new economy is funded by equity capital and sweat equity. In conventional manufacturing, gone are the days of 4 or 3:1 debt equity structures. Credit rating agencies frown at 1.5X debt levels now. Investments in new economy areas like Google, Ola, Paytm, IPL, casinos, Reliance Jio and space travel are more an outcome of guts and vision, rather than RoI and IRR-based like automotive sector, consumer products and street corner restaurants. And the new economy’s share in investments is overshadowing that of the traditional economy’s. These have reduced the potency of some of the monetary tools. More savings are also finding their bypass route to investments than through conventional banks and financial institutions, i.e. through private equity, VC, HNI, PMS systems, etc. Interest can affect consumer demand and have some effect on savers conduct, and this could be used for maximum impact.

The Indian context
The general capacity utilisation in industries is stuck at less than 75%—a level that will hardly inspire any investments. A great proportion of consumption growth has been met through imports from more cost-competitive nations. A few relatively better cost-competitive players have seen their capacity utilisation grow to fuller levels.

There are some industries (such as telecom) that have seen investment, but these are largely in the nature of ‘overtaking’ investments, i.e. fresh investments with superior offerings, driving customers away from existing players, thus rendering already standing investments to lower capacity utilisation levels. Some such industries (such as modern retail and banking) have also destroyed jobs through the use of technology.

A contrarian approach
Working capital interest rates for manufacturers with fuller utilisation should discourage stocking. Credit flow for downstream distribution and trade for such industries may be either curtailed using physical norms or prohibitive interest rates. But long-term interest rates should be kept lower to encourage quick capacity additions. Industries which see low capacity utilisation need lower working capital and export-facilitating interest rates, but long-term loan rates should ideally dissuade fresh capacity additions.

Overtaking investments should be mandated to raise a greater proportion of funds through own or equity funds. Besides being risky themselves, they also create systemic risks for all the existing players and their financing banks, and hence the whole industry should be charged risk premiums and far tighter debt/equity targets (<0.5 maybe), which would slow down such investments.

The above clearly indicates a need to junk the current general purpose credit policies and adoption of a sector-specific approach, with working capital and capacity addition loans being priced differently—risk premiums on one end and incentives on the other.

The 2008 meltdown could, in large measure, have been avoided by controlling just one industry—construction and mortgage-backed securitisation. Industry-focused approach produces results faster, is focused on the causes, and avoids unnecessary spillages and unintended harmful side-effects on other industries.

Sticking to the REER corridor of -4%/+1% on a yearly basis will help in competitive (to the rest of the world) inflation anchoring (of traded/tradable goods and services and thus overall), unless, of course, we import a large portion from the Venezuelas of the world. A 4% undervaluation will somewhat neutralise the loss/lack of competitiveness due to our infrastructural bottlenecks, substandard scales and bureaucratic bottlenecks. Such REER targeting will also determine levels of FPI/FII targets and portfolio investments.

Even if we want to anchor inflation, 6% makes sense, but giving the same width on the underside at 2% does not make sense. Any growing economy needs higher inflation and the corridor for an anchor of 4% may even be 4-6%, instead of 2-6%. Or even just 6% maximum, like highway speed limits.

Inflation, interest rates and volume of credit all have their influence on economic activity with varying degrees, with inflation being the least direct and perhaps most loose, and the volume of credit most direct and perhaps more immediate. Moderating through a more direct tool can be more effective. Interest rates can be the resultant, than being a determinant.
Fuel oil has the largest influence for a single item and should perhaps be under the central control of the GST Council, rather than be a matter of political Centre-state slugfest. Proper control of a few such items could moderate inflation to the desired levels. Indian incentives as well infrastructure are way too uncompetitive, and even as physical infrastructure takes time, one can work with export incentives.

Monetary policies increasingly look like wet blankets to suppress high fever. Without redressing the causes, we will only reap the harmful side-effects. Monetary policies do not seem to have rediscovered themselves in the last several decades with advances in behavioural economics, not even business behaviour.