Make in India spoilt by persistent low manufacturing inflation

A Copy of this appeared in Financial Express on 12-03-2018. Link:

V Kumaraswamy

Make in India is one of the key cornerstones of the current government to raise growth rates and create employment. It has been almost 4 years since the Make in India was launched with much hope and fanfare. The Government has initiated several useful steps and reforms to actualise it. The most recent upgrade in credit rating and 30-odd points jump in Ease of Doing Business will get us some mileage.

But it is clear that the delivery of Make in India is rather patchy. Several reasons have been advanced for its lacklustre show – highly overvalued currency, unfavourable ASEAN FTA, tight and unyielding monetary policies, very high real interest rates, high logistics costs etc. All of them have a degree of truth.

But it has to be recognised that beyond all these, an entrepreneur or corporate will invest only if they get remunerative prices returns are competitive to what the other sectors yield. This last aspect has not been addressed at all by the Government or inflation conscience keepers. Had this single factor been corrected, Make in India would have had a far better report card to show.

Nature of Indian Manufacture

Indian manufacturing is not high tech where heavy engineering, high end electronics, aircraft and space crafts, ship building etc. dominate. It is relatively low to medium grade in its maturity. It has a heavy dominance by industries which prepare or convert produce from agriculture for domestic consumption.

To give a few examples: Textile sector (the biggest industry by employment) is dependent on agriculture for cotton supplies and silk which can account for about 60% of final product costs, Sugar industry on sugarcane, Cigarette on tobacco, Beedi industry on Tendu leaves and tobacco, Vegetable/ cooking oil industry on sunflowers, groundnut, sesame, Food processing industry on wheat, maize, fruits, fish, poultry and Dairy industry on milk. Roughly 40-45% of Indian manufacturing sector depend on agricultural for their inputs. And a few more for inputs from Mining.

It is important to maintain a balance between input and output prices in these sectors and they should ideally move in tandem, if the manufacturing sector has to stay attractive for investments.  In India since agriculture feeds industry and industrial final goods are sold to those in rural and agriculture areas, any persistent imbalance could hurt both.

Our Manufacturing Prices are down 41% since 2004-05 in relative terms.

Terms of trade in international trade means the prices a country gets for its basket of export goods versus what it pays for its imports and how the relative price moves over a period of time. In domestic trade it means how the prices which a sector gets for its output moves in relation to the prices it pays for its inputs from other sectors.

From 2004-5, the terms of trade have been relentlessly moving against Manufacturing. If the manufacturing sector has had to pay 165% more for its key inputs from agricultural sector, it has been able to recover just about 57% from its customers. If Agricultural input prices are taken as the base, the manufacturing sector is getting nearly 41% less today for what it sells to other sectors compared to what it pays for agri inputs. (see Chart)


At one level it helps transfer of income from non agriculture sectors to rural and agriculture sector and thus corrects income skewedness. But a consistent increase of this magnitude has continuously eroded the margins of the manufacturing sector to unattractive and unsustainable levels leading to lack of enthusiasm in investing.


Year on year for almost a decade and half, Agri inflation has been more than parity. This has come about by steep and arbitrary increases in Minimum Support Prices (MSP) announced by the Centre for many crops, especially in 2009-10, 10-11, 12-13 and 13-14 possibly due to electoral compulsions (see Table). Although MSPs are restricted to certain crops, farmers tend to gravitate towards higher MSP yielding crops till the yield per hectare for other crops equalises with those under MSP. Thus MSPs impact transmits with a lag on other crops as well. One has witnessed a similar phenomenon in rural wages consequent upon implementation of NREGA.

On the other hand,  ASEAN FTA agreement has more or less put an effective ceiling on the prices that manufacturing can recover for its end products. Free trade has more or less made recovering cost inflation through domestic price increases an impossibility over the years. India’s over-valued currency has played a spoil sport on top of these.

Need for Correction

India’s growth story to continue requires Indian manufacturing to expand and diversify and create employment for those released from rural and agri sector. As the sector saddled with the responsibility of creating jobs for those entering the market, it should be the one which is relatively more attractive. Unfortunately, things are exactly the opposite for the last decade and a half relentlessly.

Ease of doing business can contribute to encourage entrepreneur by making the state machinery less intimidating but it cannot alter the base investment arithmetic of Return on Investments (ROIs).

Year Wise Inflation for Mfg and Agri Products                     (2004-05 = 100)
Year Mfg Inflation Agri Inflation Agri Inflation / Mfg Inflation
2005-06 2.4% 3.4% 140.3%
2006-07 5.7% 8.8% 155.4%
2007-08 4.8% 8.0% 167.0%
2008-09 6.2% 9.9% 160.9%
2009-10 2.2% 13.1% 589.6%
2010-11 5.7% 17.0% 297.9%
2011-12 7.3% 7.8% 107.6%
2012-13 5.4% 10.0% 185.5%
2013-14 3.0% 11.2% 370.7%
2014-15 2.4% 4.7% 195.8%
2015-16 -1.1% 3.4% NA
2016-17 2.6% 5.0% 195.0%


The approach announced in the recent Budget for MSP fixation might lend stability and certainty. If the MSPs are linked to the input prices which should include manufactured items like fertilisers, pesticides, seeds, etc. the inflation of manufactured products would have a decisive say in the agri inflation and hence MSPs. They would get inter locked.

Details are awaited on the exact scheme. Even if a margin of 50% is built in (which should take care of imputed interest, rent and profit besides inflation of inputs), it would build some parity and hence rein in persistent deterioration of adverse terms of trade against manufacturing.

Even so the heavy backlog built up since 2004-05 would need to be corrected if manufacturing is to see green shoots again. The States also should have a say in the future FTAs; they should have a choice of what industries and products to offer for free imports and what products to seek exemption from our overseas importers. States should also have a say in the fixation of MSPs.

A Rebalancing Budget – bottom up from the poorman’s kitchen

An edited version of the article appeared in Financial Express on Feb 21. Link:
This is perhaps the Budget with the widest sweep since independence – in terms of the % of people whose lives it will impact: mostly positively. Our budget pre or post reforms have shown excessive focus on industries, stock markets, and standard deductions and personal investment incentives for the salaried class. Not many of them would have had an impact on more than 20% of the people.Budgets have mostly been elitist; the economists’ macro sense stopped with fiscal deficits and growth numbers and hardly cared of how benefits were delievered at the door step of the common or poorer man.
Budget – a link in the chain: Poverty and what is being done within and outside budget.
The problems of the poor are (i) low incomes and (ii) high variability even in that limited income, and (iii) very high interest rates which kills all commercial ventures by them.
The Government has announced a MSP pricing formula, which will hopefully push more incomes into rural areas more systematically. Gas connections and proposal to buy surplus electricity from solar sytems will add to their comfort and income. Healthcare in rural areas will also create good employment and enterprise opportunities. And as Dr Devi Shetty (of Narayana Health) points out (TOI, Feb 1), there is great opportunity for paramedics and nurses with 2-3 years’ education after 10th and 12th capable of creating jobs for 5 million of them. This budget will create the demand for such services. If only we had tackled healthcare first thing after independence, may be even population would have stabilised by now.
In the last 2-3 years, the Government has tried to substantially tame the volatility in rural incomes. Crop insurance has already increased significantly -may be to 40% of farm produce during current year from negligible levels 3 years before. Life insurance of 2 lacs (for Rs 12) is already taking effect. The Budget has laid out a blue print for tackling the next most significant reason for debt trap of poor – health emergencies. With these the variability of poor family’s cash flows will come down sharply over time..
GST is formalising the economy. A more formalised economy widens the reach of cheaper formal credit from Banks. This can in turn bring down the interest rates facing the poor. It will come down from 750 – 1000% (the interest rates facing pushcart vendors according to RBI ex-Governor Dr Subba Rao. Page 266, Who Moved My Interest Rates) to a more sanguine number. Imagine what can be achieved if the costs for them comes down to 30-40% per annum which is what a Rs 3 lac crores additonal allocation and Mudra initiative, direct delivery mechanisms, Aadhar authenticated loans, Jan Dhan, etc. can achieve. Entrepreneurship can bloom in rural areas.
The Government has to work on a few more things. One is animal health, which also throws rural poor into debt traps. Agri productivity has been increasing year on year by 2-3 % on average but bumper crops only play spoil sport due to high price elasticity. MSP helps, but food-processing and exports are the real solutions.

Rebalancing gains and losses

The Government’s actions in the last 18 months is fundamentally re-balancing the economy – bringing in large sections into the formal fold by GST, DBT, Jan Dhans and Digitisation, into the tax net (both direct and indirect), and in the manner of intervening into poor households’ family budgets and welfare and most importantly bringing in the rural sector to mainstream economy. This is happening at a rapid pace and is bound to throw up some gainers and some losers. It is but inevitable that the rich 1% who are garnering 73% of annual incremental wealth (Oxfam) will lose to the balance 99% who garner a measly 27% of the wealth as of now.
But this rebalancing will also open up great opportunities. Even if it is just a transfer of wealth and income from rich to poor, since the marginal propensity to consume (MPS) of the tranferee poor is 90-100%, instead of the 50-60% of the rich, it will still create conditions ideal for consumption led growth.
Those who doubt the growth potential of the budget are missing the long term potential. Our consumption base is far too low. Its only the top 20% of population (income wise) who count for anything. When the penetration level of a basic hygiene item like sanitary pads is as low as 17% and that of adult diapers in low single digit, there is a compelling need to expand the base. This budget kickstarts the cycle. Better incomes at rural and urban poor levels will enable better FMCG growth in the immediate 2-3 years. Healthcare products and services will follow suit and create significant opportunites in the ensuing 6-7 years. Without this expansion, our growth would have been slave to a minuscule % of population which it has been so far during reforms.

Critics and their failure to see opportunities

A persistent fiscal deficit of over 4-6% (see accompanying table) seemed alright to tackle the global meltdown whose effect on India proved to be marginal, but a marginal slippage while effecting very fundamental structural changes seems unpardonable. How myopic and hippocritical!.
Fiscal Deficit as % GDP
Year        %
2007-08 2.5
2008-09 6.0
2009-10 6.5
2010-11 4.8
2011-12 5.9
2012-13 4.9
2013-14 4.5
2014-15 4.1
2015-16 3.9
2016-17 3.5
2017-18 3.5
Source: Economic Surveys

Little do those who lament lack of tax cuts appreciate that their economic efforts are rewarded by the society by higher incomes and wealth. The nation has given them access to market and the consumption basket and they need to pay or this access. Without this access, their wealth can never come about – it is two way transaction. Its sad that so much noise is being made about LTCG, when a retired pensioner cannot index his interest incomes and pay tax only on real interest rates.
Of course some of the initiatives will take 7-8 years to clear the cobwebs of culture, habits and bureaucracy to take full effect.

This budget reflects a great grip and understanding of the poorman’s budget and constraints on his reaching ‘escape velocity’ out of his hunger and poverty. It has constructed a national budget from the common man’s – women and men – kitchen upwards and each of his budget line items, so that inclusion of various kinds, delivery of programmes, poverty and hunger removal become integrated with budget making.

The usual commentators including the economic fraternity have scarcely picked up the fundamental directional shifts. They have dusted and delivered the same old cribs. In Cricketese, they are playing hook shots to yorkers because that is the only one they know.

(The writer is CFO JK Paper and Author of Making Growth Happen in India)










With Due Apologies to Pensioners

This appeared in Financial Express on 13th December, 2017

Inflation Proofing Pensioners – the real and the false arguments

V Kumaraswamy

Our tight inflation targeting in the last 6-7 years are sought to be justified on (i) stable prices being a pre-requite for sustained growth and (ii) that pensioners who largely on interest income should be protected. Such targeting is being achieved by RBI through higher interest rates regime. Similar argument is advanced against correcting our over valued currency.

That the pensioners have suffered in the last few years and will suffer heavily if we loosen controls on interest is a big myth at this point in time when coming out of low growth inertia and near nil new employment creation seems so vital.

Have they suffered in recent times?

The main argument is that the pensioners with fixed income will suffer capital erosion through inflation and will have less and less real capital base to earn their future incomes. If interest income remains constant but expenditure keeps going up year on year due to inflation, progressively they will be left with smaller amounts to consume.

Table 1 clearly shows that this argument is clearly overdone in the last 4-5 years. Ever since the 4% CPI inflation target has been articulated and rather doggedly pursued by maintaining higher interest rates, inflation has fallen steeply whereas the interest rates have not traced the same trajectory.

From 2005-06 till 2011-12, the interest on Bank Term deposits were 1.5% more than the WPI inflation and 0.7% less than Consumer Price inflation. Since then, interest earners have had it good and the interest rates have been more than both – by a whopping 5.6% over WPI and 1.5% over Consumer Inflation.


Table 1: Interest Rates and Inflation – Pre & Post 2012
Period WPI Inflation @ Inflation Consumer Prices # Interest on Term deposits @
Ave 2005-06 to  2011-12 6.6 8.8 8.1
Ave since 2011-12 2.3 6.4 7.9

Source: @ from RBI; # from World Development Indicators.

But why the all-round feeling of being left out by the Pensioners now as the social media would have us believe when in real terms their income is 3 times compared to the period before 2012. In the years since 1991 except for a brief period between 1998 to 2002 asset prices have always been going up, in many years faster than inflation. When there is asset price inflation there is the wealth effect which makes us feel wealthier and prone to spending more, as articulated by economists. But once again in the last 3 years, real estate prices have hardly gone up. Without this illusory wealth effect backing, pensioners may be feeling poorer off.

Class of Interest Earners and Pensioners

People in agriculture tilling the land are unlikely to be living on interest income. They till as long as they can and then reply on family as the social security net on reverse mortgage of sorts – family supports them on the understanding that on death, his property will pass onto them. This is 50-60% of rural population. Landless labour are unlikely to be hit due to interest rate variations; they would need a safety net of a different kind. Non- farm rural labour is unlikely to be living off bank deposits.

People who are largely living on interest income are most likely urban or middle class. Most of them hedge their bets and have houses, gold etc. as safety nets and only a portion of their savings is in interest bearing instruments.

Amongst these are retired Government employees, whose pension is adjusted for inflation from time to time if they have been in service before 2004. They are a substantial proportion among pensioners. Those who joined after 2004 are unlikely to have retired by now.  Those who are most likely sufferers are those who retired from private service. Let’s see what proportion these are.

The total term and savings deposits of the banking system as of Sept 2017 is about Rs 114 lac crores and with the MF, Small savings and Public deposits it would be about Rs 130-135 lac crores, which is about 80% of our GDP. The comparative figures for US is more than 150%.  At an average rate of 6.6% this would give an income of Rs 8.91 lac crores or 5.5% of GDP.

From the above, we have to deduct the interest accruing to people still in service and Government pensioners. The income accruing to those who are surviving on interest alone is likely to be less than 2% of population.

Effect of Currency Devaluation

One of the strident and stubborn arguments against correction of our overvalued currency is that it will lead to inflation and hurt the interest of pensioners. The Urjit Patel Committee has summarised the several studies (see Table 2) on India estimating the inflation over the short term and the long term from a 10% movement in Rupee versus USD. With the singular exception of Ghosh and Rajan, the resultant incremental inflation (from currency alone) is likely to be 0.6% in the short term to about 1.5% over the long term. This is hardly worth the scare given the real income of pensioners have risen 3 times since 2012.


Table 2: Impact from 10% Depreciation of Re vs US $
Author Period Covered Short Term Inflation Long Term inflation
Khundrakpam (2007) 1991 – 2005 0.5% in WPI 0.90%
Kapur and Behera (2012) 1996 – 2011 0.6% in WPI 1.20%
Patra and Kapur (2010) 1996 – 2009 0.5% in one qtr WPI 1.5% in 7 qtrs
Patra et al (2013) 1999 – 2013 1.5% before 2008 crisis 1% after Crisis – WPI
Ghosh and Rajan (2007) 1980 – 2006 4.5%  to 5% in CPI  
Bhattacharya et al (2008) 1997 – 2007 1% – 1.1% in CPI 0.4% to 1.7% in CPI
Source: RBI – Urjit Patel Committee Report


Pensioners Vs Job Seekers 

Should our monetary system be so sensitive to such a small proportion of GDP and the group of people behind that (less than 2%). A 2-3% drop in interest rate in line with inflation would help the investment climate substantially especially in utilising capacities lying idle. The number of new job seekers is about 0.75 – 1% of total population each year.  For years on end the job creation has suffered and they will far outnumber Pensioners and its time their aspirations are also met.

Deposits till death.

If term deposit interest rates spread inflation had been same post 2012 (as between 2005/6 to 2012), Banks would be now saving Rs 164,000 crores on the incremental deposits of Rs 40-odd lac crores. If similar reduction had accrued on Central Government’s net additional borrowings, it would be an additional Rs 74,000 crores. These amounts saved would be sufficient to take care of those who purely depend on interest for survival.

The real sufferers can be taken care of by special deposits which can yield 2 % over CPI inflation s.t minimum of 5%. The deposits can be on joint names of spouses and on death of the latter to die, the deposits can be given over to the designated nominees after deducting tax. If prematurely withdrawn by depositors, the interest can be recalculated as per past prevailing interest rates and the balance of deposit paid to the depositor. Those who are entirely dependent on interest alone could be easily taken care through this mechanism from the potential savings as earlier estimated.

The writer if CFO of JK Paper and Author of Making Growth Happen in India (Sage).   


Shape of Economy – Interview with CFO Magazine


V Kumaraswamy, CFO, JK Paper Ltd says the new indirect tax law will bring rural economy into the formal fold and, thus, help create an inclusive economy

Is it Time to rework our Monetary Policy Framework?

My article with the title above (different in title between the Print version and e-paper version) appears in Financial Express today.


The government seems to be in a bit of bind over both employment and growth, not for all its as own making. One of the chief contributory to this morass is the inappropriate way the objectives of our monetary policy have been fixed or evolved over the last 6-7 years. The Chart shows clearly the increasing misalignment between the inflation, external value of Rupee (as reflected by REER) and the interest rates caused by the recent shifts in our monetary policy. The Chart uses the WPI instead of the new found CPI which is 57% out of control of RBI’s policies as the report itself admits.

Two main components as it operates in our Monetary Policy Framework are (i) to target a consumer price inflation of 4% with a tolerance of 2%. Both the variable and its levels are recent developments, and (ii) to aim at orderly conduct of the forex markets without seeking to target any particular rates.

Fundamental flaws

Firstly, in both these, the targets are fixed without reference to any end goals in mind. As if these are desirable self-actualising end-goals in themselves. In economics everything is interconnected – inflation, interest rates, growth, employment, productivity, cost competitiveness, etc. To seek a deterministic nominal goal in a web of influences looks naïve at best.

Secondly, the objective that the economy desires to achieve may vary depending upon the stage of growth. It can vary for the same economy from time to time. For EU it is kick-starting growth now, for China is to stabilise it at a high rate, for Japan it is to grow – any growth – even if very low by international standards. For US it was achieving any growth after the meltdown but now slowly crossing over to stabilising inflation. A nominal fixed target does not address these contextual concerns.

Thirdly, economics is mostly about balance and trade-offs between what in general are opposing interests – buyers and sellers, producers and consumers, workers and producers, savers and investors, inflation and growth and so on. One isn’t sure how a nominal deterministic inflation number can work towards an optimal or at least desired equilibrium between savers and investors, between domestic investments and imports at all times even in the medium term.

Lastly, as is explained below, there is excessive and suicidal reliance on the nominal rather than real variables, which is what may be causing the current problem.

No basis

There seems no theoretical basis for the inflation targeting or its levels – not from IMF, not from Basle norms which aims at financial stability or RBI. While nothing can be exact about economics and hence a band is necessary for targets, a 2% tolerance on 4%, is like permitting Usain Bolt to run on his track or the adjacent tracks on either side and the penalties for trespass being imposed 2 Olympics away.

Just orderly movement of forex rates is no policy. When it is clear that it has a significant impact on domestic capacity utilisation, jobs and growth to just aim to only curb the volatility but not be concerned with the values is naïve shirking, much like driving without violating any traffic guidelines or speed limits but towards a wrong destination. By keeping the currency over valued for far too long (over a decade now), we are re-creating conditions of 1991 crisis.

Way forward

Keynes had brought out the true nature of the real and the nominal economy, the rigidities exhibited by the real and how to tweak it by using the nominal to achieve real goals. The current constant 4% inflation (nominal) target can in no way balance the interests between savers and investors, forever. The government should move to a 2% +/- 0.25% real interest rate regime. Whether the inflation is 4% or 9%, such a real interest spread of 2% will be a fair compensation to savers. It will also not curb investment urges if what investors have to pay out is in line what they recover from the market through inflation in prices. This is a sort of inflation proofing both savers and investors.

Such a floating nominal interest (but largely fixed real interest rates) regime will largely ensure that fresh investments and savings do not grind to a halt.

But the existing outstanding stock of savings are in fixed nominal interest regime, which poses problems. It is therefore necessary to move to a floating nominal rate regime and increase its proportion. In the last few years, Bank loans have largely become floating rate with optional repayment and a significant progress has been achieved. It is necessary to increase the proportion of floating rate bank deposits from the savers side as well.

The second thing that is capable of derailing growth and employment in an open economy is the forex rates. An overvalued currency makes imports cheaper, exports far less remunerative which affects domestic employment and growth. A 20-22% overvalued currency as on date is a killer. Government should mandate RBI to walk it along in an orderly manner along the real values. RBI and Government should agree to maintain exchange rates within a band of 97 -103 REER. This REER should be calculated on a base year that is sound when most economic parameters (CAD, fiscal deficit, inflation, growth, etc.) are as close to our desired objective. As it stands now, 2004-05 is one such year. The government should also tailor its inward investment policies accordingly and the degree of capital account convertibility tuned appropriately.

Currently policy rates it appears are decided mostly or solely on inflationary expectations. This can result in fear mongering. In deciding the policy rates, perhaps the actual for the past 2 quarters should be given equal weightage.

By moving to the real from the nominal on both interest and forex accounts, we may have learnt the right lessons from Keynes. Excessive reliance on the nominal on both accounts have made India underperform its potential in the last 4-5 years.



Poverty. Or Lifestyle by Choice. And the Genius of Julius Nyerere.

Poverty. Or Lifestyle of Choice

Poverty alleviation to my mind is a patronising imposition on the unsuspecting impoverished as the rich see the poor. I have seen extreme ‘poverty’ at first hand in many parts of Eastern rim of Africa, East Asia and India in what are some of the poorest regions. Its not that the poor are exactly sending out distress signals for rescue.

Their smiles are broader, worry lines on their faces far lesser, leisure activities and small talks of humour reveal more enjoyable times, families better knit, better at peace with the rest of creation like Animals, rivers, environment, trees, etc. Their care for the rest – elders or younger- seems better and worries about what next and what will overcome their existence near non existent. Yes I am talking of the extremely poor. Of course I am talking of those in regions that would truly be called the poorest by any economic patronizers.

The rest of the paras is about a tribal village that we visited recently in Tanzania located between Gorongoro and Serengeti both world famous abodes of Wildlife – first a conservation area, which means both animals and native people are allowed to live together and the latter a National Park which means no human habitation is allowed.

There is nothing spectacular to further my arguments / conclusion in my description, so be prepared for some disappointment except some heat at the end.

Our Visit and What we were told

When one gets down from Gorongoro’s crater rim one could see from time to time people sleeping on hard rocks in baking Sun with just a crate of water. Or young children – alone or 3-4 at odd places with nothing else in visible distance. You wonder where they live and what they are upto – completely bewildering.

In the middle of nowhere is the tribal village (Bora by name) amongst the vast stretch from horizon on one side to the craters rim and small volcanic mountains on the other side. There is a small stream a KM or so away and a few trees near the stream.  There is a vast area of pebbles, sand grains, mixed with goats droppings, a few blades of grass visible here and there and a disproportionate number of sheep grazing or trying to graze them.

The Village has 122 people all belonging to the same person. He and his 20-odd wives, their children and grand children. They spoke a dialect of KiSwahili. They belong to the Masai tribe which stretches from south west Kenya to west and north west of Tanzania.

The driver called out and a man of the tribe who spoke fluent english (and of 24 yrs of age as i later enquired, Seiko by name) came out to negotiate with us. He had studied Secondary in nearby town in a boarding school and was in line to pursue graduate studies after a year or so – there seemed no reservation for them – perhaps for noone in Tanzania).

We were told that the fees for our visit per person was $ 20 and we negotiated a consolidated $ 100 which Seiko agreed only after checking with his head tribesman.

they performed a dance for us in which they invited us to participate. We never understood the lines but it was all about jumping about with a staff and a kind of oversized wooden hammer shaped like a scoop – spoon. (see pictures). But when we finished some of them asked us ‘Barabar?’ in Hindi with an approval seeking smile on their face.

The Village: The village boundaries are marked with some twigs and Acacia branches, more for warning animals than human intruders. We understand that the whole village takes about 3 years to build but a single hutment about 2-3 months – all entirely made of twigs, acacia branches to lend strength and cow dung and some ash for binding. There must have been 40-50 houses in 2 concentric circles, with a central open space where they were displaying handicrafts for sale.

Their houses have a master bed may be 6’X4’ and an adjoining 4’ X 5’ and a fire pit hardly a foot away from them. The drawing cum dining cum kitchen cum store must have been another 5’X6’ – fire seemed eternally burning. In one corner was some firewood, water for cooking and some vessels in place. It is the duty of women to build and maintain them. They let out the entire village in case they have to shift out somewhere and some other tribe is willing to take it, though i was not sure what that contingency might be.

Each lady of this polygamist society had a separate house for herself and children.

2           Divisions of duties: The society we were told is divided into Children (boys and girls), Women, Warriors and Elders. Children play and sometime help out (of late some attend primary school) in grazing cattle. Its the duty of women to construct houses and maintain them, upkeep of village pathways, raise children, housework and cooking. Warriors are males who are trained to ward off dangers primarily from Animals during migration. They train in using some acacia staves and some wooden hammer (they weigh quite heavy and just one blow might throw the lion or leopard out of its wits and leave the tribe to itself). They don’t hunt for there is nothing that they can or are allowed to. The Elders are the judges, rule makers, administrators, liaison people with external communities or government, deciders of any changes to their customs, etc.

3           They follow a religion called Engarai (not sure if I got that right), which worships the volcanic (long extinct) mountain and fire.   There was a lonely Christian (which the tribe had allowed) who had a neck chain with the cross. Apparently, he had attended some higher school or college in Kenya and had attended some Churches and developed some affinity to the religion. There were also a few others who had been to Iskcon temple but had not converted to the faith.

What to do with the dead seems to be in a state of flux of late. The long standing custom was to sacrifice it back to the God i.e the mountains. In between they thought it should be offered to water. But seas are a thousand kilometres away. So they thought that if they buried the dead they would be carried by the earth to the seas. They tried out cremations but are back to burying in the mountains now. Somehow they seemed undecided as of now, waiting for the next big thing.

4          Marriage custom. They are all polygamists each taking 3-4 wives. and there is no incest. so the women have to come from other villages. Once they come over, their contact with their parent community is near totally lost. The man has to propose and the female accepts or rejects. After the girls accepts, her parents have to approve and then they have to inform the village head which is usually the grand or great grand father. and then the Boys side, although none of them stand on their basic decision. (I could not get any answer as to how such a skewed ratio can be sustained unless the ratio of women to men is also similarly skewed). When the village headman dies his next eldest brother takes over and the line of succession is very clearly laid out.


5           Social upbringing. The children are born into the society, we were told – not just to the parents who biologically bore them. Its the duty of everyone to look after and bring up the children and the children in turn have to do whatever duty is assigned to them by the village elders – no saying no if not coming from your parents etc.  Male children take cattle out for graze and females house building, maintenance, cooking etc. So both ways there is nothing individualistic or home centric – everything is village centric – belonging, upbringing, duties and responsibilities.

The skin tone was great, no cragginess or folds despite the harsh Sun they have to face thru the year. No worry lines – not at least as much as you see in similar aged people in cities. Smile but no giggle or ridicule, quite disposition no cynicism is how I would describe.

No exaggerated exuberance or garrulousness that is typical of most Africans. It was more a guileless dignified ‘easy to make friends’ kind of welcoming ness.

6     The Culinary. Basically the entire food chain revolves around the cows and the sheep. For a group they claimed to have 3000 cows and an equal number of sheep. Cows give them milk and blood and meat and sheep mainly for meat. They drink the blood of cow every morning for breakfast along with milk. The extract the blood by puncturing some blood vessel and letting it ooze, without killing the cow. There is meat at Lunch and a soup of herbs and plant roots along with meat in the evening. There is no fruits or vegetables for them – ever.

We did not see any cows during our visit. We were told because of lack of grass and water, cows had been taken to a nearby place – 2 days walk, for grazing.

The entire medicine is made up of herbs and plant extracts and only in very rare occasions people are sent to outside towns for surgery etc.  Sanitation is primitive with near total open defecation out in the fields.

7           Economy : The entire economy revolves around Cows and sheep. When we entered they collected our fees in USD. They sell some handicrafts made by the women. The proceeds are used to buy their clothes – which looked neat and clean and i had no clue as to how they kept it that way, all in deep blue and red colour combination. The water in the stream  is hard and incapable of being used for cooking or drinking. They buy their water in tankers (stored them in syntex tanks) and a tanker of 22,500 litres last for about 3 weeks- some economy indeed.

8     The School visit: (see the photo with a man walking towards a small hut. Thats the school). The school is primary and sets them all together for 2 sessions each day one on the morning and one in the afternoon. We saw a glimpse of the 2nd session. The students stood up and sang a song in Swahili – led by one and repeated by others – welcome to Bora, our holy land, Welcome to Gorongoro, welcome to Serengeti, and welcome to Tanzania. The teachers are sourced from within their colony and teach them english and how their native tongue is constructed (that too thru english alphabet) and basic arithmetic.  Beyond that students go to boarding for secondary education and beyond that to distant cities in Tanzania or Kenya for even higher education. But those going outside are limited in number and is a recent phenomenon. The primary school itself was started in 2003/4 only. It will be interesting to see what influence the education has on their culture. There were 4-5 of outside graduates we could see and our guide was one. They spoke good english and one of them had become a Christian by choice and others had exposure to Hare Rama Iskcon movement.

The Warriors are trained in the use of their weapons and have the duty to protect their cattle and cows from animal intruders and from animal during migration. They smear some ash on their face – may be different patterns for different ranks. They don’t eat with others – they prepare and eat their meals outside the village near the stream – wonder what is the reason.

9     The Genius of Julius Nyerere – We also heard of another community of one Boni Louise who had 27 wives, 70 children and rest to make a community of 147 living somewhere in the stretch. The govt had offered to take them on board, provide for education and give them skills and jobs. But the Village headman had refused and the government had no problems with that. The Government made a standing offer for providing teachers for free should the village chose. After long years BL accepted it to forma school for his grandchildren and there ended the govt’s role. Basically Julius Nyerere has done a more commendable job of 2 types of integration after Tanzania’s independence – religious and cultural. Tanzania has 45% Muslims and 45% Christians and the rest making 10%. The population is one and no visible signs of tensions anywhere during the last 50 years. They are Tanzanians first and whatever religion they are, next.

Again he did not force development or education on any of the 120-odd tribes. They were given the option of integrating with the national mainstream but just an option. And where they just wanted to access only education they were allowed without precondition.

The net result after 50-60 years is that we have several societies or village communities who have their own rules and regulations, cultures, law etc. over which the nation has no say. But they also have a strong respect and love for the nation. Finest form of Democracy with no force or pressure tactics used anywhere, anytime – everything by choice. And no militancy or naxalism anywhere – all nationalists by choice. That explains the students’ song. In that respect Nyerere seemed to have done a far better job than his mentor Gandhi or even Mandela.

My Take on the people

The students in the school looked at peace with themselves like any of their city counterparts, seemed competent at what they were doing but not over eager to please us. The men looked healthy, again not too eager to prove themselves or ingratiate themselves as some of the country cousins tend to be when they come in contact with what they think are superiors. They dealt with us as equals I thought.

At a point in time when we asked them questions which appeared invasive, a silent pause to make us understand that we are off limits is exactly how you expect someone who is sure footed to handle a difficult situation. The ‘foreign returns’ and the outside educated did not betray any signs of dis-ease with their native surroundings nor any snootiness over the rest. They seemed well integrated and at peace with their community and no visible or subtle signs of dissatisfaction or Freudian slips anywhere that their true leanings were elsewhere or their desire to be in the cities or towns.

Their politeness, sensitivity, courtesy levels were laced by a sense of unhurried ease secure in the belief that the other person will not run away with what’s yours and hardly betrayed any rabid competitiveness. The village was neat and clean with no litter – even of food remains – to be seen.

On a Philosophical Note

My take is that they have lived exactly same lives the last millennium or perhaps the last million years. Other than perhaps the recent changes in clothing and education. It would be interesting to see how education affects them, whether it leads to any conflict between the educated and those without, whether it leads to younger ones challenging the Elders and all the civilizational conflicts. The younger ones seem to have come back out of choice and happy embracing the village life. As of now it appears that they wont move from their equilibrium. Happy as they are, with what they are, where they are, who they are…with their surroundings.

Their today is an exact carbon copy of yday, day before, last week, last year, probably the last 1000 years. The children would be doing exactly what their grandfather and head of the tribe would have done when he was similar age. The tribes head would be seeing his sons and daughters in law doing the exact thing he had observed his parents do. In a sense everyone had the script with him and his role was frozen in it.  Nothing to strive for or compete for that the society would tolerate. Seniors juniors  and young ones -they all have the same houses. There is no greed in such a situation, there is no competitiveness or need for savings or safety at individual level. Even concepts and words like regret, failure, lack of success, (all about the past) and fear, confidence, optimism, savings  (all about the future) may be largely irrelevant or lot less diluted.

They are the perfect example of sustainability in my opinion. They have already proved it in my opinion. Lets come back after a thousand years or a million years. The tribes will and can subsist exactly as they are – their lifestyle wont destroy the river nearby (unless it dies by itself), they wont destroy the trees, they wont dig the hills or mountains for minerals or metals, they don’t eat the wildlife, they wont mishandle the cattle since any quick reduction of cattle will threaten their own existence. All the current notions in the developed world seems an apology or euphemism at best, in comparison.

Makes me believe its an ideal most Oriental spiritual heads or religious heads crave for. They live in time zero. Somehow happiness is inextricably fused it appears with time. You move away backwards and you long for or regret yesterdays and with it the unhappiness. You move forward you develop fear, greed, despondence, confidence or lack of it or successive waves of it, and you find people in the most affluent societies walk to their office with heavy worry lines as if they will face the yellow slip on arrival or go back to their residence as if when they reached there their spouse would have deserted them for a better choice.

Choice may not necessarily mean Welfare. Just get rid of the words Greed and Individuality …life can have a completely different meaning altogether. Like particles behave completely unpredictably under zero gravity, greed and individualism seems to make humanity to go berserk – no amount of savings is enough, no measure of success enough to satisfy – we are in a permanent pursuit to prove ourselves to others and earn their certificate, no end to competitiveness to prove others are not as good as you, destroy nature and its various creations in the name of development and give euphemistic proselytization to others.

They may be called poor. But there is no poverty in my opinion. Its their lifestyle. By choice … choice not to move away from what they have seen work. And no good Samaritans have a right in whatever name be it religion, democracy, freedom, women’s liberation, human rights, etc.  have a right to interfere in their choice. For happiness you seem to need equilibrium not necessarily fly around in A380s or zip around in fast cars. And they seem to have that in plenty. They have inherited it from their forefathers and will bequeath it to their successors nth  generation. And in doing so they would not use up an iota of nature, But most certainly we, the development champions,  would have exhausted our Gas.

Way to kick start economy – Currency Devaluation or Fiscal Stimulus?

An edited version has appeared in Financial Express on 13 Oct 2017

Currency Correction or Fiscal Stimulus?

V Kumaraswamy

The feeling of sluggishness is palpable everywhere. There are talks of stimulating the economy by fiscal incentives etc. This can be a very innocuous medicine for reasons of (i) dosage, (ii) potency, and (iii) long lead time.

First the dosage. The government may throw Rs 50-60K crores as fiscal stimulus. This is about 0.4% of our GDP. Given the current moribund state of economy with 25-30% underutilised capacities it is too tiny to have any impact. The current closure of capacities or lack of investments have not become so for 1-2% poorer realisations or profitability. While the figures vary for different industries, it is substantial – more in the range of 10-20%. We need a correction of this magnitude. The gaps in our competitiveness with countries exporting to us like China, ASEAN and Korea is 10-15%; not a 1-2% pittance.

Next the potency and wastage. Any incentive will reach both Units operating at full capacity and units with low utilisation and poor profitability. Units which are closed or NPA currently could hardly be revived with a small ‘spread thin’ incentive. The incentives reaching units operating at full capacity will neither create incremental growth nor new employment. There will be a lot of wasted (applying where not needed) efforts.

Finally, the lead time. If stimulus is by way of Income Tax rebates, it will be a year or many quarters before the recipient feels it and reckons it in his decisions. If it is by way of Indirect tax cuts, the recipient knows that it is for a limited period and will not motivate him for taking a long term investment decision. We need some immediate actions and most fiscal measures take a long lead time to get results. It may be well beyond 2019 that one would see perceptible results.

The current problem

The economy is stuck at a low and unresponsive equilibrium.  The current economic impasse is born out of 3 main factors (i) high internal value of currency (low inflation targets resulting in high real interest rates), (ii) may be partially from it, high external value of Rupee and high real interest rates attracting too much forex flows which are beyond the capacity of economy to absorb and (iii) free trade with ASEAN which kicked in from Jan 2014 in full.

ASEAN FTA did increase supplies and kept prices under check. It made import parity as the main basis of price determination for many manufactured goods. But it also eroded domestic industry’s profitability since manufacturing prices have hardly risen to cover inflation of inputs in wages and inputs from agriculture. It delivered customer stable or reduced prices but took away their jobs. India’s growth is creating Jobs but in other countries!

Somehow inflation control has become the focal point of our monetary management in recent years just like fiscal deficit is for our Union Budgets. While the fiscal deficit control is understandable, in an open globalised economy when product of every description could be freely imported, supply shortfall induced inflation is out of question. From Pulses and rice, to apparels, to electronics and Ganesha and Navrathra idols everything can be imported these days. So supply constraint induced inflation is the least that RBI or the Government needs to worry about.

Ways to correct imbalances

The main contributory reason for our lack of competitiveness with other regional players is the high external value of our currency. The sooner it is corrected the better, either by devaluation or dis-incentivising inflows.   But devaluation can cause inflation. As is reasoned out below inflation can be phantom enemy if things are calibrated well.

The first thing is to reduce debt limits available to overseas investors and strictly adhere to such limits. There is nopoint accumulating reserves to earn 1-2% returns by paying 4-5% overseas as interest in $ terms.

Secondly, there could be a temporary tax on overseas investments into India. This can be even for ECBs, investments into government debt and all inflows which are not required for physical imports. Taxing interest on GOI bonds will lower their yields and contain inward flows. There could be a surcharge on inflows till the related imports also take place. These could be used for re-capitalising our banks.

As a corollary, Government can mandate that fresh foreign investments can only be in new government bonds issued, on which the GOI can offer much less interest rate. Such an exercise will help the GOI as well. Such issuances can be allowed for secondary trades may be a separate bond segment with lower interest will develop as a result.

Containing Resultant Inflation 

The Government should bite the bullet like it did with GST and correct the near 22% over valuation in one substantial go. It can reset $=Re at Rs 71-72, which is 11% correction.

Monsoon is good throughout the country and agricultural inflation may not be a risk. If in fact there is excess production, a good forex rate might help evacuate some surplus so that domestic prices don’t crash due to oversupply.

In the long term, a 11% devaluation is about $ 40 billion in added inflation. This on a GDP of approx. $ 2400 is about 1.6% – may not be unbearable. But it’s the short temr effect on imported products and their immediate derivatives and next level products.

Oil is the largest at 25% of import bill.  Government (state and Central) should put a price cap. Their duties (customs, Excise and VAT together) account for a third of final price. There can be a freeze for 12-18 months in Re-terms on these. Oil marketing companies which have expanded their margins in the last few months can be told to absorb a third and the rest can be passed on. An additional 3.7% inflation on oil will amount to about a 1% on final inflation. Gold and Diamonds are next. We should not bother with Gold (the costlier it is, the better) and Diamond is largely for processing and hence related exports will make up for the input inflation.

That will confine inflation largely to manufactured goods. Most prices today in manufacturing sector are determined by import parity prices. A 10-11% correction would most likely translate into a similar uptick in their prices, which could help several factories (most especially textiles) to start chugging again. In any case, buyers of manufactured goods have had it too good for the last 5-6 years without much inflation.

Protecting the pensioners and interest earners needs to be balanced with the interest of freshers in the job market. The total interest paid on all bank deposits and Small savings and MFs is less than 5.5% of GDP. If we remove the government pensioners and those who have not yet retired from this, it would not be more than 1-2%. The number of those entering the job market and finding themselves without jobs will far outnumber those surviving solely on interest.

Currency correction will also solve a lot of NPA issue. A 10-12% increase in industrial realisations will turn many industrial units from potential NPAs to preforming ones.

Superiority over fiscal stimulus

Currency correction will hit the problem where it is. The dosage at 11% on the total value of trade (both imports and exports) is huge. It will alter the domestic profitability substantially and have an immediate impact – from the following day morning.

Sure forex borrowers will suffer. But those who have covered their exposure need not worry. For those who have not covered or partially covered, they have made good gains for the last 12 years on the trot. Why should not they not be made a pay some back now?

An equilibrium cannot be corrected by fiscal stimulus which will be better for rectifying confidence issues.

(The writer is the author of Making Growth Happen in India, Sage Publications).