Vietnam’s Sensible Communism Vs India’s Dysfunctional Democracy

Vietnam’s Sensible Communism Vs India’s Dysfunctional Democracy

I started following Vietnam with my 1st visit to that country. Brief comparison of Per capita income (current $) with India between then and now is below:

  2007 2016 % growth
India 1081 1850 71%
Vietnam 920 2306 151%

I would attribute Vietnam’s faster progress to the following:

Respect for the government,

Fear/respect for law,

Better road discipline and public order,

Its sensible and sensitive communism,

Pragmatic Economic planning and policies – no dogmas and every regulator is sub-ordinate to the government, and

Focus on a select few industries.

I am not sure if our Democratic rights is worth this kind of price (if indeed the difference is due to this factor). I would largely prefer getting rid of our poverty first before aspects of freedom we are supposed to be enjoying.  As a nation we spend so much to elect our representatives but tether them in every which way and make them as constrained, dysfunctional and impotent as possible. The judiciary, NGT, Johnny-come-lately Regulators, Independent Monetary agencies, NGOs, PILs, and of course the Opposition and the media which is answerable to none all play their part to this collective coma and inertia.

And of course ‘We the People’. We are perhaps the most argumentative and critical people on planet Earth. We mistakenly celebrate a right to abuse as right to criticise. I would think criticism to be constructive should exhibit the following characters:

  • The person being criticized should feel like listening to the point being made, whosoever makes them.
  • Having done so, he should feel like entering it into his consideration set.
  • And if he does accept, he should feel like acknowledging it publically.

You may say I am a dreamer… but so be it.

Vietnam has not lost its energies in vague policies and utopian and unpragmatic copycat controls like tight monetary and fiscal policies, demo, or swatch bharat, digitisation, corruption eradication, ease of doing business, etc. It just focussed on 4-5 industries where it had /developed cost competitiveness.

Like Textiles, Electronics, Tourism, Wood plantation, select spices. It reversed the conventional approach of economists and started at the delivery end. Wood plantation created 2 million jobs in remote rural areas, in textiles it zoomed past India in just 7 years (its current output of textiles is capable of generating 2.2 cr jobs by India’s standards of mechanisation) much of which has come at the expense of India’s unpragmatic approach in textiles…nose to the ground politicians engaged in job creating in select few industries.

I personally feel that we have more to learn from Vietnam (or South Korea, China, or Taiwan) than the stupid West (I mean West is not stupid, we are… in aping them) as far as it concerns Economics of development and salvation from Poverty.

I would think that PILs should be asked to prove their Public interest character. They should be made to submit signatures of at least 1000 people or 1% (some such thing), who shall be made to deposit a bond of Rs 1000 each. Select few should be called to testify in the Court. The lead sponsor should be made to deposit 10% of the likely damage being suffered by the Society (or some lumpsum amount which can be a % of what the Government alleges is the cost of delaying). This should be forfeited if the case is not admitted or dismissed.

I would also think an independent body should verify the proofs of news and broadcasts by Media and if found insufficient, the concerned channel should be made to show blackout of related programmes for 3 days. Unbridled criticism in our society has only been an invitation to chaos.

(the picture shows the Visiting Dy PM – HE Pham Binh Minh).

Singapores Economic Woes

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Singapore’s Economic Recession

Singapore has been a powerhouse of economic growth and icon of modernity and innovation in the East.  As recounted by everyone I met, it has been in recession for the last two years. One of the foremost and lead sectors of services is the oil drilling and exploration, oil rigs, and transportation of cargo.  These have been sluggish of late and seem to have affected Singapore also significantly. The sector has seen staff shedding of significant numbers as a result. As a result other service providers to them like legal services, audit services, banking, etc have shrunk a bit – may be quite a bit and have had to down size some staff themselves.

A significant amount of investments by outsiders into Singapore was in real estate. This has caused the real estate prices to climb up steadily. In the recent years native Singaporeans have complained of unaffordable real estate prices and living costs. The minimum house price for a middle class is about SG$ 1 million. They have contended that it is not possible to support such a capital cost/debt on a salary of SG$ 6,000 – 8,000 average salaries and started migrating out of Singapore to Australia and elsewhere.  To tame it down or reverse this, the Govt has put a 15% stamp duty – to discourage runaway property prices due to purchase  by outsiders. This in order to help the ‘locals’. Due to this extreme measure (this must now be the highest stamp duty anywhere in the world), the outsiders have virtually stopped brining in investments.  And construction industry ahs seen a steep slow down and large layoffs.

Added to this, Singapore has signed off on Fatca and other money laundering agreements spearheaded by US. As a result of tight monitoring and policing and KYC requirement, the funds that were managed for private wealth clients out of a liberal and efficient Singapore have seen a steep decline. And this has led to layoffs in this sector of high salaries curbing further their spends.

‘Singa’pore is a highly dynamic and innovative society. You can’t keep it caged for far too long. I understand that the DyPM who was handling economic affairs so far has handed over to someone else (i forget the name) to put back the economy on rails. And his mentor is Dr Y V Reddy who commands a high respect there – RBI for the way it has handled several world- wide crisis 1997 East Asia, 2002 internet bubble and 2008 by their conservative approach is respected the highest by Singapore Monetary authorities I was told by at least 3.

It will be interesting to see how they bounce back. I am sure there will be some lessons for all the rest.

It stands to reason the first thing to be hit in a recession will be the discretionary expenditure. Usually when i walk from my usual Hotel Park Royal to Komala Vilas, MTR, Ananda Bhavan etc – all within 100-300 meters for my dinner, i will hear the blaring music belching out of many Music clubs and Dance bars – Hollywood songs, bollywood songs, Tamil, Hindi, etc. But this time there was just a solitary one. I am sure one day the magazineEconomist will develop a Karaoke index to measure the level of economic activity a la the Big Mac index.   Or use the level of vouyeuristic activities to measure the Economy. 

 

Roads alone dont mean Development

Roads and Connectvity alone may not deliver rural development.

Got 2 days to drive around in Rayagada district in Southern Orissa, amongst the poorest 3-4 districts in India. One could not but admire the great strides Roads have made in the region. Govt also seems to have made a lot of progress thru residential school for tribal children which seem well maintained (I saw 3 of them within 20 km stretch). A few takes and lessons.

1 Our first stop was a plantation nearby under the aegis of co-operative group. while the increase in tree growth was visible due to better farm practices, what was not visible was the government funding agencies which recoil at the first sign of trouble.  If risk aversion is the primary motive, development initiaves in such societies at the brink of economic existence will all fail. The Government has to take a more sanguine view – the farmers are never going to take advantage of legal loopholes a la a kingfisher nor dodge a bank manager, if he is solvent. if he has the money he will pay. counter party moral hazard is likely to be the lowest.

2 I met the farmers (slide 11) but it was a difficult conversation. My Hindi was not good currency; the accompanying colleagues’ local oriya was only a passable currency. Thank god we have one language across India. I asked the farmer in saffron T-shirt upto which class he has studied. He prevaricated but signalled something to the locals which was translated to Sixth Standard. (But barely convincing). The man in green T shirt seemed to own 2 plots. With some difficulty we could figure out it must have totalled 3 acres. I asked him what class he has been upto. He signalled to the first one and said something to the effect – to the same extent. (I couldn’t believe him either).

3 Visited the training centre of local SHG which had trained itself in book binding hoping to get some contract jobs in the local banks, factories and shops. (see the videos and the group conversation). We are not just short in financial inclusion alone. Of the sample of 20 i saw, none had been inside a train, only one had been upto class 10, 19 out of 20 did not know 3rd table, only one had gas. Surprisingly none of them had worked in NREGA.  2 claimed to own cell phones (but they all knew what i was talking about) and 2 others cycles. All had electricity and claimed that they toilets.

But i was deeply touched by their guilelessness and genuine warmth. The meeting had been arranged with just 15 minutes notice. They gave a locally made flower bouquet and coca cola (to everyone).

4 Many villages seem to be independent land locked republics within India. I could only with difficulty hold myself from asking if they knew that they belonged to a country called India or that it was once ruled by Moghuls or british and that it has got its freedom. (I did not know if it is lawful or will be deemed instigative; hence i stopped). But as you can see from the video they had very little to do with India or its development. The only ‘Indian’ they seemed to know was Naveen Patnaik.

Villagers (see slide 5) in this tiny hamlet had erected a bamboo toll gate and refused entry or exit unless we paid their toll. Toll collectors were 2 young girls of may be 9-10 yrs. There were chawls on the side each having rows of houses sharing walls with others on both sides. each such house would have been around 10ft by 10. I could see 3 or 4 ladies sitting inside and 1-2 hanging outside besides the children baking themselves in the sun. I could see a solitary hand pump, the cemented platform around which served as a open bathing spot for a village adult in full view of all those who cared to see.

5 We wanted to visit the solar pumpset which was to be inaugurated to supply water from below 200 ft to some 26 acre of land. we reached the spot at around 5 pm but found a group of people (nearly the population of the entire village) walking towards a spot very near the solar system, with 2-3 of them carrying what looked like spears. Later i learnt/saw that it was for the pre-marital prayer to thier chief temple/diety (see slide 3). After their modest prayers were over they perhaps ascertained from our guide the purpose of our visit. (Our guide knew the villagers since we had sponsored the project). There was quick confabulation amongst the villagers. They took some time off their routine to give me a ululating welcome (local custom) and performed an impromptu folk dance for me. (see video). Meaning i was told ‘bahooth dhoor se aaye hai our guest; lets welcome him’. Nice of them.

6 On the way we stopped by a hostel schooling tribal children. (see slide 4). I started asking the most grown up looking amongst them (the one to my right and the one in yellow T-shirt). But they were hardly able to speak but were stoic. the care taker intervened to say that it was their first day in the school and where they have come from and circumstances; I had difficulty preserving my tears within the countours of my eyes.

Some lessons:

1 The region is poor and crop mainly cotton, hurhur, millets and in some places Rice. Recently they have added tree plantation to their kitty. Area is rain fed which imposes its own limitations.

2 False pride is good: Although efforts from several CSR activities, govt initiatives, etc seem to be on the area is largely illeterate. You can get a sense of what they mean by literacy in the video of SHG group. The men in slide 11 claimed they had done upto class 6 or 7 before dropping out. I doubted both. But on reflection found that kind of ‘false pride’ a welcome sign. It only indicated that thay have accepted that education is a desirable end state and they are craving for a better end state than they currently were in; this desire and higher aspiration is a prime requirement for any development initiative to succeed.

3 Thank God for Hindi: The areas were hardly 12-30 kms from the district headquarters. Imagine that we had not integrated India with one language formula – with every district and sub district speaking different dialect or variations and so much time and effort lost in translation -it would have been a massive waste of national energy. (Thank God we have saved ourselves this much at least due to proper actions on independence). Our politicians have done somethings right.

4 Can Roads and Connectivity alone achieve progress: I have been visiting nearby places for the last decade. The roads have come up very well. Most village roads are concretised. The times on most roads, district, sub district and state highways have become 1/3rd and it is much more certain and lot less damage on your spine and vehicle parts. Communication connectivity has also improved greatly. Most villages have someone or the other with cell phones. The progress in literacy and living standards seem nowhere commensurate with the progress in govt infrastructure. (guess not even 15-20%). We seem to be miscalculating the linkages between the 2. (I am not saying these are not important; but how much they are able to use them at this stage is questionable. Looks like a 25 terminal airport for 2 flight landings a day). Roads in most parts seem ready for the next 25 years. (see the photos).

Government may need to work on assessing the skill levels of each village and work on each village to boost their income. The focus has to be on increasing their ‘marketable surplus’. (elaborated later).

TV in each home (still a pipedream in many villages) and programmes for social change, advisories on agriculture, personal health and hygiene will all serve great purposes.

Gas seems economically misplaced. The payment for Gas goes out of the village system whereas the fire wood they were using was ‘manufactured inside’ the village boundaries. (this needs to be studied and validated)

5 There is great potential in increase in crop yields. Our scientst told me that soil should be so prepared that the loosened soil should just about envelope the aura of the root system. It will enable the root system in absorbing the nutrients and fertilisers without running off. Tight soil wastes them on top and loose ones enable run off. There is different requirements for different plant species but most places in India resort to uniform ploughing. Soil nutrients are different from place to place – may be even within the same village. Fertiliser and nutrients have to be adjusted accordingly. He claimed that such care alone can improve the crop yields (physical or financial) by about 60% in India.

The villagers also require better linkages to the markets (for many of them the universe ends at the village boundaries and their Government is the Village headman). Such increased linkages with partner end user corporates will bring them better technology, softer credit, better information, opportunity to add more value (like sorting and grading, washing and preparing them for markets and these can sometimes be significant 30-40% of mandi values) at village level itself. Government need not relax land ownership rights at all; just more facilitative of contract kind of farming will do.

6 Corruption to me seems a secondary issue in these places. For most of their transaction with the ‘outside’ world they need transactional interpretors who can (and do) take them for a ride in every possible way – be it in religious conversion, NREGA money distribution, freebees from government, etc. It is this that they have to be liberated from first even before corruption.

7 Trapping more income inside is essential at this stage: One of the  villages had an electrical repair shop repairing fans, TVs, motors and pumpsets, and lighting earning Rs 4-5k per month. In most other villages this amount is paid to external people. Govt has to analyse such possibilities of retention of income within village as well enhance values of what they sell outside and prepare them for newer activities like vegetable growing, fishing, water harvesting, solar panels, sanitary pads making (may be for a few villages in the nearby areas), poultry and milch cow raising. This requires external help and may be investments. Government can rope in retired civil servants, local students, corporate and wealthy individuals as Village development sponsors and draw up a village level development plans and guide these villages along the path of development. India has just 6,00,000 villages.

8 Compared to what the individuals, NGOs, judiciary and media and voluntary systems have achieved, the work of the government in these areas is so far starkly ahead, at least in the last 10 yrs. The remedy of our constant carp may be redesigning the election systems so that it becomes lot less expensive and faster administration of punishment for political misadvantures. What can u achieve from a justive system which passes judgement on disproportionate wealth accumulation after 20 years and after the person has died). If these 2 can be addressed and we give the politicians some space, perhaps we can make faster progress.

If judiciary and Lawyers can together ensure that delivery is not derailed and delivered within 2-3 months for cirmes, crimes and thefts etc might even vanish. Even Politics will become a lot cleaner. Will our Lawyers accept the challenge. In fact the media should also concentrate on exposing lawyers who delay justice infinitely by misuing their priveleges.

9 India should perhaps have gone for European type co-operative model of corporate existance than English and American type Limited liability company types. We are high social animals and more susceptible to social policing and peer pressures than top down relatively more impersonal legal governance, audit and rules based systems, court trial and punishment systems. social pressures would have achieved the end result at a far reduced cost. (may be, I am foolish, but when no one can prove it otherwise let me take some liberties in being expansive).

(Sorry no videos in this piece)

Demonetisation Lessons from Brazil

An edited version of this article appeared in Financial Express today. Link: http://www.financialexpress.com/opinion/note-ban-lesson-from-brazil-best-way-to-demonetise-is-not-to-have-one/472432/

Public policies are best when a lot of reason goes into their formulation and passion into their implementation.Those looking for an effective recipe for formulation could learn a lot from Brazil. It has demonetised its currency 8 times since 1942 and thrice simply knocked off the last 3 digits of its currency overnight i.e. like a 10,000 Cruzeiro (then Brazilian currency) will be 10 Cruzeiro from next day morning.

Lessons from 1830s to 1942.

Even before from 1830s it has been compelled to experiment with its currency due to evolving politics. The early experiments are to do with metallic convertible bases like silver and gold, metallic copper coins, birth of parallel paper money,  etc.

In early 1830s in order to stabilise the external value of Mil-Reis (then currency), the centre starved supply of currencies reducing the circulation of copper coins in the provinces. The provinces responded by issuing their own notes to neutralise demonetisation. Promissory Notes issued by Commercial banks valid for 15 days by law began to be accepted far beyond their due dates. (Source: Page 39-43,  Monetary Statecraft in Brazil: 1808–2014, Kurt Mettenheim)

Some other time commercial banks were allowed to issue bank notes (like in Hong Kong where currencies were issued by Standard Chartered and HSBC till accession). This led to loss of control of central authority and dilution of monetary policies.

Brazil through its history has clearly proved that no one can ‘starve’ the people of currency for far too long.

1942-1994

This period was mostly about high government expenditure, unbridled fiscal gaps and high inflation. Brazil demonetised 8 times before the last one in 1994.

It has had to change its currency, the ultimate form of demonetization for every conceivable reason – to tackle black money (Indian objective), to tackle hyper inflation, tackle daily cumulating interest rates of 3% (which is nearly 50,000% p.a.), base erosion, commodity price volatilities especially in Copper or just to avoid confusion (if Brazil had retained its currency same as in 1942, it would be 1 US $ =  2750 followed by 18 zeros, a nightmare for the accountants). They have been far deeper than t he Indian type demonetisation – the entire spectrum was replaced and the currency itself renamed.

The last in 1994.

The most recent in 1994 seemed Quixotic. It was aimed more at breaking the psychology of inflation. With 100% inflation consistently for 14 preceding  years (in 4 years over 1000%), shops had to revise prices 3 times everyday. That is when the government decided to use two currencies simultaneously – one virtual for counting the real value of currency and another for payments and settlement – and every shop having to display its prices in both and revise it 3 times a day.

But unexpectedly, people started anchoring their values against the real value (which was set near 1 Real Value unit = 1 US$).  Within a quarter or so, it was clear people were not rushing any longer to shops to avoid their currency buying less than when they started from home. Inflation abated and the real value became the Real the official unit. It was perhaps one of its most successful experiments that has lasted till date.

Lessons from Brazil

People will seek ways to settle transactions in the most cost and effort efficient ways. For many transactions in much of India, using currencies across the counter is still the most efficient option. In 1970s and 80s, when there was a coin shortage of sorts,  Chintamani co-operative superstore in Coimbatore used to issue their own tokens. These slowly gained acceptance with public so much so that even government owned busses and offices used them.

The parallel systems will start issuing notes and IOUs which will be strictly ‘enforced’ amongst its members through extra legal authorities.

One thing Brazil has always got right (between 1942-1994) is to have the 1,2,5,10,20,50,100 note sequence – considered the most friendly from transaction settlement point of view.

Currencies are as much about psychology and convenience as values for accounting and transaction, as the 1994 experiment so decisively proved.

The best way to demonetise is not to have one – avoid inflation, avoid unjustifiable or un-implementable tax systems, and not to issue too much of it anyway. Brazil has about 3% as currency/GDP whereas India’s is11-12%. Government should have incentivised and reduced it by 1% every year rather than force it in one lump.

A parade of demonetisations has not exactly curbed either parallel economy or corruption in Brazil. Corruption and black money is so rampant, their President was recently impeached for corruption, their biggest real estate tycoon is behind bars and may have to spend the rest of life there if not politically rescued.

Why black money or parallel economy, there is a near parallel administration being run by the mafia through drugs, extortion, violent thefts (one murder every 10 minutes i.e 140 a day, down of course from 600 a day not so long ago), etc. none of which will be happening through tax paid cheque money transfers.

Conclusion

In summary Brazil offers 3 ground rules (perhaps not with successful examples as much as negative narratives):

  • the way to tame inflation is not periodic demonetisations but curb state populism,
  • the way to curb black money and illegal economy is not starving people of cash but well thought out tax policies and effective punishments, and
  • the way to protect free trade from causing domestic unemployment problems is to maintain the external value of the currency which in turn is achieved by restricting external capital inflows to just what is required for financing current account deficits. (Donald V Coes, Macro Economic Policies and Growth in Brazil, 1964-90)

One would definitely give credit to both the government and RBI for curbing state populism within FRBMs. But given the levels of corruption in tax collection systems itself, black money curbing through demonetisation seems an ill fitting solution. Unemployment is rampant and growing due perhaps to highly overvalued Rupee and extra terrestrial real interest rates.

The daily dose of RBI circulars does indicate that someone is extremely alert at the wheel but whether he knows the destination and if it will deliver enough gains for the pains people are experiencing, time alone will tell.

The writer is CFO and author of ‘Making Growth Happen in India’ (Sage Publications)

Modi’s 500/1000 move may have sent him to stratosphere; but he has to be more convincing

 

I have a slightly negative view on the likely impact of demonetisation more especially the proportion of people who have to undergo the pain for catching a few (may be less than 1%) errants. In many cases the Govt may also know who those politicians/individuals are. So spoke to several people (besides several corporate types during the course of meetings) to gauge the mood; lucky I have not gotten beaten up yet.

First a Kaamwali (she wasn’t all that specific except that mentioned that she has just got Diwali bonus), a Receptionist in Mumbai at one the largest cement firms (she was inconvenienced but said that she supported Modi since it is required for the nation), an Old and frail Tamilian lady who needed some help with Kiosk check in, and my driver for the day. He with a bit of glee and satisfaction said “I had only Rs 3000 which I will exchange”. “Is it required? Do you support it?”. “Yes He has fixed all those **** (reference to some community). They have been asking for it, crooks. They were hoarding so much black money”.

A slightly serious looking Security staff who frisks you at Airport at CS in Mumbai.  When I opened the topic he was cross with me and put his finger on his lips to ask me to shut up. I trailed off with Modi’s name. His outlook took an about turn and asked in utter curiousness ‘Kya Kya Kya?’

I said Rs 500/1000. … he: yes yes. Me : Do u support it. Him: Yes sir.

Me: Why? Aren’t you inconvenienced?’

Him: ‘Yes sir. But that’s little’.

Me: So you can bear it.

Him: There is Hope sir now. I will bear it. His mouth was quivering. I was expecting an English response I was not prepared for an emotional response. I just patted him and said “great man Keep it up” and moved on.

 

2 jet pilots flying off duty. “Sir I can hope to buy a house now. They used to be asking so much cash… where will i go for that kind of cash. We support it”.

My next victim was a 5th std Master Kavya studying  in Singapore Public School in Dahisar seated next to me. Slightly on the studious side but very eloquent and fluent for his age. I took his mothers permission to talk to him for a few minutes.

He would have liked Clinton to come back, since she would have succeeded Obama who is a great friend of Modi. He likes Modi because he is the one to start Swatch Bharat which will clean up India.  They debated the effect of Rs500/1000 in the school.  The teacher briefed them on what ‘black money’ is. They had concluded that black money is not a fair system that some people bear and some people go free, it is cheating. He said that his parents would be greatly inconvenienced but still he supported Modi wholeheartedly.  ‘Its required for the Nation’. Views were erudite but he made his point in a manner befitting his age.

 

I was zipping thru most of Delhi and India Gate at 9.45 which was deserted like someone had announced that a nuclear bomb is going to be dropped there in an hour’s time. ‘Aaj Kya hai?’ I asked the Mega cab driver. ‘Logoan ke pass paise nahi hai’ he refrained. I thought I had at last found an ally and started a conversation. But he was more than a fan of Modi; he almost looked an appendage to him. Next 15 minutes he gave me a lecture on how Modi is good and how what he does is good and how it will benefit in the long run. I had no choice as his captive audience.

 

With 6 -7 others also, Modi seem to have scored a perfect 10 with this move – somewhat surprising for a debative society…he has managed to whip up a frenzy to ecstasy in support of his action. ‘Sock those Black Money B***ds’ seems to be the mood.

 

I did not expect such a one sided view from lower /middle income people.  So when I write this piece i know I’m in a minority. But still i present my sour grapes.

 

And Now the Sour Grape

Someone asked Deng Xio Ping the architect of Chinese reforms, on the 200th anniversary of French Revolution as to what its impact on Democracy was? He replied, ‘Too Early to Tell’. My instinctive reaction is to reserve my judgment on this recent chest thumping by Modi fans on his recent salvo (Mandatory Disclosure : I am a Modi fan myself, except i want to temporarily suspend that status on this issue till i get convinced on the benefits of his recent action).

What has been done is bold, no doubt. His speech was more patriotic, but it needed to be convincing more than being patriotic is my opinion. He could have told the nation on how much Black money he thinks is in circulation, how much the Government aims to garner thru this action, how much Taxes the Govt hopes to get as a one-time measure and how much on a running long term basis,  how much additional growth its going to create.

Most of all how am I as an individual going to benefit for the pains imposed on me – at least in qualitative terms. I have not earned a penny with tax dodge – rather I am yet to get so many I Tax  refunds (petty though) from the Govt since 1995-96. This is a pure compliance measure; so to impute any sense of patriotism is unwarranted, i reckon.

Half way into Modi’s term, i am far less convinced about his (or rather his cabinet’s) ability to deliver on the one most important thing – growth and with it employment for the rural, youth, newly graduating. I don’t think there is even a plot or story line leave alone a convincing plan. So i am not willing to be mesmerised by side shows, however impressive. If MMS was lack of action, Modi’s cabinet seems to be lack of ideas. Growth seems to be in an anaesthetic state. Just excessive focus on a few things  alone is not enough to run the country. And he hasn’t addressed the core issues causing black money – unreasonable stamp duties and Capital gains taxes alongwith election funding… in that sense the monster will sure take rebirth and start from zero again

When some Isreali said that even they would have been proud of India’s surgical strike, sure my chest went up 560 inches. Sure he is doing a great job of whatever he is doing; but then is he doing what all needs to be done?

While resolving strictly to comply with the rules, i am tempted to suggest the following actions:

Devalue our currency also – to may be around Rs 76/$ which is its true value. Impose a 30% tax on Chinese imports citing national security interests (their actions on Brahmaputra and POK).

It will create all the jobs that our youth and country needs.

To give a sense of balance, sure Demon’n will ease inflation and hence interest rates. It will make real estate more affordable and not prone to periodic price spirals and so people may not invest in them out of desperation but only when needed and look for better alternative investments. May reduce fees and prices of sectors thriving on black money like doctors and lawyers and some professional classes. It will motivate me more to pay taxes…but that alone may not convince the 99% abiding citizens to strain themselves (i thought so… but quick survey exposed my hollowness) to facilitate the government to catch the errant few.

With some serious disgust i should also mention that balanced debate seems impossible on this subject. Modi baiters throw all kinds of silly bile  … it won’t work, too draconian; what happens to A, AA, MA, BA,him, etc., will not succeed using anything from vile adjectives to heavy invectives. On the other hand Modi fans are rather obsessed – they talk as if this is the best thing that could have happened to the country since independence, this act required stature of Go… or such terms. You utter your reservations, abuse is not far away in time.

I am sorry. I am a big Modi fan myself. But i refuse to back him wholesale. I retain my right to be critical on certain issues or as in this case certain aspects of proposed action. To surrender this right of mine is an assault on reasoned debates and a vacuum of balance.

When we were descending I asked Kavya as to how he would like to be told by the teacher on any issue (i) Just be told by the teacher what to do in a stern way or (ii) she explains the matter, tells him about the risks and benefits and recommends that he acts. He didn’t hesitate to vote for 2nd option.

At last some consolation for me. Modi could have taken the convincing route than the prescriptive school teacher approach.

Demystifying GDP numbers – as articulate a statistician as you will ever find

Demystifying the confusion around GDP figures

Attended an address today by Dr Pronab Sen, former Chief Statistician of India and Chairman National Statistical Commission. I must admit despite his slightly absent minded looks, he is the most articulate economist I have heard in a long time. Some excerpts. He threw a lot of light of issues generating lots of heat in the press nowadays. (Errors in figures if any is entirely mine).

Should we believe the new GDP growth rates reported

People confuse output for income. GDP is not the sum of turnover but income. A consumption good may be traded at 4-5 intermediate stages before it reaches the final consumer. Then GDP is not the summation of the turnover of the 4 intermediate trades but just the income (Value added) at each of these stages. Example: if an auto mfgr imports components of Rs 30, assembles and sells the car at Rs 55, the dealer to retail showroom at Rs 70, and the retailer to customer at Rs 80… the GDP will be Rs 50 (25+15+10) not Rs 235 (30+55+70+80) or Rs 205 (55+70+80).

Thus GDP is not summation of  Value of Outputs (VO) but summation of Value added (VA) at each stage.

GDP = ∑VA  or = ∑VO * (VA/VO). i.e output into Value Added ratio at each respective stage.

In India the long term average (1950-1998) VA ratio was 16% for manufacturing industries. Between 1998 & 2003 it increased to 18%. By 2011-15 this has increased to 22.5%. Thus a lot more value addition is taking place in our output than anytime in the past. Even if our output may not have grown at higher rates, the value added component in that output has gone up … giving higher GDP numbers. This is what is being witnessed now.

2             Typically in a downturn, industries invest in efficiency improvements rather than investments in physical assets. In Boom time they invest in physical assets (may be indiscriminately). During 2 crunch times of 1998-2003 credit squeeze and 2011-2015, India has invested and become far more efficient and is achieving higher VA in its output. We are lot more competitive globally today than 10 years back.

3             China also invested heavily in physical assets during boom years. Their VA/VO ratio was also fortunately high in mid-20s which has fallen and stands over the last decade to 19% now, less than India’s in several sectors – a sign of over investment. They are now investing in efficiencies and technologies. The World average (long term) is 18-19%. India is well placed now on cost competitiveness and more industries should identify their strengths and grow; they should not worry too much about our size being 1/5th or 1/10th of China’s in their industry.

Why corporate profitability is low in spite of higher value added

4             The VA  has 2 large components – (i) what is paid out as wages and salaries (WS) and (ii) other operating surplus(OS) (paid out as interest, dividend, retained surplus, etc.). In the last 5 years the average rate of growth in WS for India as a whole is 17% p.a. meaning far more is paid out as salaries and wages and the share of OS is 10% p.a. of which the share of interest has been high. Dividend payout has also increased dramatically affecting Corporate profitability and retained surpluses. Wages and salaries in rural India has risen faster than in urban areas/industries.

Shift in manufacturing profile

5             The share of unlisted firms is growing faster than listed companies. Unlisted firms are growing at 12% CAGR while listed firms output is growing at 7% CAGR. The share of informal sector has quietly reached 40% today.

India is becoming more entrepreneurial. It would not be surprising to see that in the next 5/10 years, the top 20 of the 40 construction companies will be totally new and unheard of now.

6             Black money distorts asset allocation.  Most of it is kept in black assets – gold and real estate. Now that there is drive against black money, real estate is suffering.

On Why IIP numbers (index of Industrial production)  don’t reflect our higher growth    

7             IIP numbers are constructed from select industries. Those mfg industries/product which contribute at least 2% of total is selected first. Some of these may have 8% some 5% and so on. 14 such products contribute 80%.

For these products/ industries, just the top 6 firms (turnover wise) are selected. Their rate of growth is taken and averaged and reported as IIP numbers. The index we are using has a base 2004.

During the last 10 years between 2004/5 and now, the small and medium scale sector in these industries have grown far faster (at 14% p.a) than the corporate sector (7% p.a) and the sample 6 have grown even slower. The share of small firms have grown from 30% to 50% in the last 10 years – a fact not captured by the index.

Construction of any index is a time consuming and costly exercise based on extensive surveys. Thats why they are not done frequently. A new series with base 2011 is in the offing, which might set right the anomaly between GDP and IIP numbers.

Why Indian industry is not investing even if it is growing

7             Informal sector which is growing the maximum does not have much savings – it is squeezed out by the money lenders – their main source of finance.

More is paid out as wages and salaries, who may not have the same investment urges as retained earnings.

and of course the High interest rates (see below)

Interest rates

8             Indian interest rates are very high. It attracts a lot of portfolio flows which come in and keeps Rupee artificially high and un-competitive. The way to correct it is to let the interest rates fall which will enable the industries to invest and absorb these flows. If the flows are properly absorbed the currency will find proper level ($ may be Rs 72/75 instead of being Rs 67-68) and portfolio flows will be moderated. This has not been allowed to happen and our real interest rates have been kept artificially high.  We are just accumulating reserves instead of putting it to productive use.

9             Indian industry is crying hoarse on high real interest rates. What they should be screaming at is the differential interest rates. Between 2008 and now these have moved significantly against India.

Our corporate interest rates were 9% average towards end of last decade when the global interest rates were 4.5 % – a gap of 4.5%. Today our interest rates are 10.5% when the global interest rates are kept at 1.5% a gap of 9%. Not an ideal situation for investments. It is better to invest overseas, even if to supply to India.

Thus Indian industry is caught between artificially high interest rates and artificially high forex rates which does not enable them to raise prices in line with costs.

Difference between Planning Commission and the current NITI AAYOG.

10           The previous planning commission had a 15 year, 5 year and 1 year plans/horizons.

15 years – There was a broad perspective plan which was not generally well known or publicized.

5 years – Better known as 5 year Plans. This was an approach paper.

1 year – laid out the expenditure for various programmes.

The NITI AAYOG has a 15, 7, 3 year cycles.

15 year. Vision document – the Government has asked the Niti Aayog to come up with this.

7 year – plans and programmes.

3 year – implementation plans for the above.

NPAs

11           The current NPA is entirely that of Corporate sector. The priority sector NPAs have remained at their usual 1.5%.

12           From financing just working capital needs from retail savings our Banks are now financing long term loans from the retail savings. More than 50% of lending today is for long term loans.  This is inherent mismatch. Our commercial Banks are not just designed to deal with NPAs.

13           It is not that we were without NPAs earlier. The long term loans were earlier met by DFIs (IDBI, ICICIs, IFCIs) which financed themselves with long term Bonds (15 year types) and were far better able to deal with temporary fluctuations in business and time taken to rectify/reconstruct even bad decisions. It is simply not feasible to deal with them on a quarterly basis, which is what the banks are expected to do now.

Government Jobs – Best Insurance against Inflation

5-4-1997

The Hindu Businessline

The security offered by Government Jobs seems to be best inflation indexed bond… it does not just compensate for what inflation has eroded, it provides for twice as much…

Read on…

Govt Jobs as the best inflation proof bonds