BOOK REVIEW: HUBRIS by MEGHNAD DESAI

BOOK REVIEW

Title:                              HUBRIS

Why economists failed to predict the crisis and how to avoid the next one

Author:                          MEGHNAD DESAI

Publisher:                    Harper Collins Publishers, 2015

Price:                             Rs. 399/-

Meghnad’s Magisterial Mystery Tour

The author Meghnad Desai, is a Professor Emeritus of   The London School of Economics (LSE), Lord of the realm, Bollywood movie/music buff, a distinguished British/Gujarati economist named interestingly, after a towering Bengali mathematician.

Desai is also a popular talking head on Indian TV, adviser to the British government on its monetary policy and financial institutions, columnist, author, well regarded by his peers in academics both for his erudition and intellectual honesty. With his distinctive mane of hair and affable mien, Meghnad Desai is indeed a man of many parts.

HUBRIS may be a short book, but it is magisterial in terms of Desai’s deft grasp of European and American economic theory from the dawn of the modern era, meaning, Meghnad style, around the 1500s.

He points out the postulates of the early economic theorists, elements of whose ideas, most notably the search for economic ‘equilibrium’, are quite often carried over to the present day, but these notions are from an era when the commercial world was a very different place.

Desai writes fascinatingly of ‘cycles’ that seem to occur as an inevitability in all economic endeavour, much before the 1870s, when economics ‘had become a professional subject’. The meditation of this book is how to influence if not control these seemingly involuntary cycles, that can create both great prosperity and havoc in the lives of people around the world.

Many rather cosy theories fuelled by the realities of imperialism and colonialism persisted for a century under the ‘Pax Brittanica’, although every other major European power was working the same logic, with varying degrees of success. Everything changed however with the cataclysmic paroxysm of WWI in 1914.

The famous John Maynard Keynes makes an appearance soon after. Desai clearly likes him: ‘He did not stay in his ivory tower and pen articles and books. He was a man of affairs-speculator in the stock market, chairman of an insurance company, journalist, author of a bestseller, civil servant, controversialist, patron of the arts, husband of a ballerina, Fellow of King’s College, Cambridge’. ‘Controversialist’ is a word Desai seems to have coined just for Keynes.

Keynes found the nostrum for the Great Depression of the 1930s. But something similar or worse seems to be lurking about, threatening the world once more in 2015, wages  of sin for decades of debt fuelled growth. Desai seems to suggest a combination of manoeuvres may save the world, in case disaster strikes, rather than any one all-encompassing formula.

Keynes was the first to advocate government spending on projects that employed many people, because they would collectively foster a consumption boom as they spent their wages. ‘The money would circulate’ as Desai paraphrases the Keynesian outcome, and the goal was ‘full employment’, as near as possible.

It was also Keynes who coined phrases such as ‘propensity to consume’ inspired by psychologist Sigmund Freud, and ‘the exotic notion of animal spirits’, the unleashing of which is the ambition of everyman’s economic policy to this day.

Still, Keynesian economics, from the 1920s and 1930s, that persisted through WWII and the post war boom, particularly in America, is no longer thought of as the Holy Grail.

The ‘Achilles heel of Keynesian policy was inflation’ greatly aggravated by the ‘oil shock’ because the price had not risen for fifty years till 1973. And then, in one year, the price of oil quadrupled in 1973! The boom and bust cycles were back with a vengeance. And this was accelerated by the ‘influence of speculation’.

In 2008, ‘on the eve of its bankruptcy, three different potential purchasers were trying to read the accounts of Lehman Brothers and were none the wiser as to the assets/liabilities situation.’ And so, as Desai puts it: ‘If the model admits no possibility of failure of prediction, and the regulator accepts the model’s assumptions, the results are that both the poacher and the gamekeeper will lose’. The ‘malaise’ is embedded ‘in the theory’.

The ongoing eurozone crisis began in 2010 and is the ‘second leg of the crisis that had started with the collapse of Lehman Brothers’. What is the solution? Some, like post-Keynesian economist Hayek, say ‘deleveraging’ is the answer. But of course, this is another name for austerity, and imposing it is easier said than done for the pain it causes.  Besides, this time around, all the liquidity at near zero rates of interest cannot seem to raise the inflation rate off the floor in the West!

Meghnad Desai says the government in Europe are trying to stoke inflation but admits that the outcomes per earlier economic theorists have changed.Desai’s HUBRIS is in his own words ‘a journey through the history of economic ideas,’ an exploration and recounting, without claiming to have all the answers. 

The economic cycles afoot, according to Desai, are actually more like three concentric rings working simultaneously, and together. There is a long cycle, perhaps 70 years or more, postulated by economists such as Kondratieff and Schumpeter, a shorter cycle ‘in the income shares of wages and profits’, of some ten years duration, put forward by economists Marx-Goodwin, yes the Marx; and a shorter one still, ‘caused by the gap between the market rate of interest and the natural rate’, theorised upon by economists Wicksell and Hayek.

Meghnad gives an interesting account of how these cycles may have worked in the past, via the clarity of hindsight. He thinks Europe and America are currently in a Kondratieff style downswing, to last for the next twenty five years to come, with growth rates that will be much lower, at 1 to 3%, than the boom rates of 1992-2007 that were as high as 6 to 7%.

The emerging markets, including India and China, will grow much faster, in comparison, though China has now slowed from double digits to around 7%   .

The last word from Desai is: ‘Capitalism is a dynamic system but it works through creating cycles and crises. It is a disequilibrium system’.

And to sign off, he quotes the old discredited bug-bear Karl Marx: ‘Mankind sets itself only such tasks as it is able to solve,’ before saying, on his own bat: ‘We shall solve the problems yet. No one can say just how’.

For: The Pioneer, BOOKS

(1,032 words)

July 31^st 2015

Gautam Mukherjee

Date With The Hangman

Date With The Hangman

The inordinate focus and debate that has been raging on the hanging of Yakub Memon on the 30^th of July 2015, a man who was, undeniably and substantially, involved in the terrorist carnage of 1993, is nothing short of remarkable.  

He was not only deeply involved in the planning and execution of the Bombay blasts of 1993, but was probably his brother Tiger Memon’s key henchman.

As the saying goes, the real story is rarely in the crime, but in the cover-up. There has been much said and written, of late, once Memon’s hanging date was announced a couple of weeks ago, oft citing a 2007 article by RAW official, the late B Raman, about how Yakub Memon had turned approver.

He indicated that Yakub Memon practically allowed himself to be caught, with multiple Indian and Pakistani passports, and quite a bit of other incriminating paperwork. Raman, on his part, thought he should not have been condemned to death by the courts, way back in 2007, when it happened for the first time, and wrote as much.

The ‘liberenzia’ has seized upon the exaggerated notion of Yakub Menon’s supposed ‘innocence’, driving multiple appeals to the Supreme Court and the President of India, and taking supportive positions publicly on social media, the press and on TV. But everyone knows approvers might qualify for a reduced sentence, but are hardly ever deemed innocent!

Did Yakub Memon, if he was actually an approver, deserve to hang? Who knows why the Supreme Court found merit in hanging him anyway, even after multiple reviews, but it suggests that there is no substance to the ‘approver’ theory.  

Was Yakub Memon then, a sacrificial lamb or decoy, thrown to the Indian authorities by his own co-conspirators, so that the Indians could also save face, and desist from huge covert retaliation across the border?

Perhaps, but we will never quite know. Besides, no conspiracy on this scale goes without insider help from the politicians and officialdom and this applies as much to 1993 as it does to 26/11.

Dawood Ibrahim, himself the son of a Bombay policeman, is renowned for his  enduring clout, to this day, amongst the power elite in Maharashtra, police structures, the  big builders, the stars/producers of Bollywood,  plus other influentials in Bombay/Mumbai. This, according to crime reporter and author Hussain Zaidi, who has written two very well received books on the subject, one of which has even been made into the acclaimed film Black Friday.

The willingness of the Supreme Court to apply itself to the maximum on such a matter of  Yakub Memon’s life and death however, is borne out by the late night sitting, that still resulted in a thumbs-down for the final time on the night of the 29^th of July 2015.

But it is yet persistently rumoured that Yakub Menon provided much of the hard evidence, documentation and details on who precisely was involved in the attacks, and to what extent, and what they individually and collectively did, how the Pakistani establishment was in cahoots up to the hilt. But unfortunately, none of it, even if it is true, was found to be provable in the very proper criminal courts of our system.

Intelligence gathering however is a process very different from how the Indian civil and criminal courts work. Yakub Memon, if he turned approver, presumably to mitigate the consequences of the law upon himself, did not do so ‘officially’, presumably because he spoke to our ‘spooks’ and other shadow boxers.

What came out clearly in the courts however was Yakub Menon’s culpability and guilt, and that he was careless enough, or miscalculated the benefits of, straying into the hands of the Indian intelligence agencies.

The explanation for this too exists. It is said that Yakub thought he would be better off in India. Better off than at the mercy of the ISI in Pakistan, virtual prisoners and ‘strategic assets’, like his brother Tiger, Dawood Ibrahim and other fugitives from Indian law. They are there still, apparently cowering in gilded cages, but, out of our reach.

Still, the stark facts from 22 years ago speak for themselves, as if it were yesterday once more. Not only were 257 people killed in the blasts, scores more wounded and maimed, and millions in property destroyed. All of it, ostensibly in retaliation for the demolition of the Babri Masjid in Ayodhya, where an ancient edifice that was both temple and mosque, was brought down by Hindu activists, including a large contingent from Mumbai’s Shiv Sena - without, however, any loss of life. Except that is, for the ‘Bombay riots’ that followed it.

So the ‘revenge’ that Tiger Memon allegedly spoke of, is mostly for the riots in Bombay of the time. But the perpetrators, as explained very well by Hussain Zaidi in his two books , extended to random innocents, Hindu, Muslim, others, and not the big-wigs in the Shiv Sena, for fear of savage and stiff retaliation.

That Yakub Menon was the only key terrorist caught after the blasts, condemned to death, and hanged, after spending 22 years in jail, is indeed ironic. But, the fact that many who were accused of involvement, but let go and acquitted, because of inadequate evidence, is no less remarkable.

Is the civil and criminal justice system equipped to pronounce on terrorism given its elaborate processes? The truth of the matter is that much is rotten in the Indian legal system, including being over-burdened and the curse of extreme tardiness.

It took an inordinately long time, many years too, for Pakistani Ajmal Kasab, who was captured, as it were, with a machine gun in his hand, and scores of victims strewn around him at 26/11, and the Kashmiri Afzal Guru, who plotted to kill parliamentarians and blow up the parliament buildings during the Vajpayee administration, to reach the gallows as well.

It must therefore be said, the Indian State could have saved a lot of time and money by having such cold-blooded killers, treasonous conspirators, and out-and-out terrorists, domestic, or from abroad, tried by a military tribunal, before being executed forthwith, if ever they are caught alive.

Going forward, we need a separate military tribunal that applies the laws and protocols used when a nation is at war if we want to end this travesty  and circus  that we can ill afford. Its working also polarises and traumatises civil society to have this kind of wound opened up again and again in the name of justice.

That the usual civil and criminal law processes, applied to terrorists and traitors, who in a very real sense have waged war on the nation, killing soldiers and policemen and civilians- men, women and children at random alike; is probably  a bizarre and perverse misapplication of a genteel justice system.

How can the same due process be made available to bloodthirsty enemies of the state? It is also enormously tardy, expensive and wasteful, and not what the criminal and civil legal system  was best designed for.

This legal system must assume a person is innocent unless proven to be guilty. This burden of proof is not always possible to dovetail, with the methods of guerrilla warfare perpetrated by well-trained killers. Terrorists,with huge amounts of weaponry and technology at their command operating by stealth on soft, mostly unarmed, targets. Why then is this nicety of a civilian justice machinery being offered to such terrorists and traitors?

Perhaps the raging debate on whether the death penalty should be repealed, as a badge of our civilised sensibilities, cannot, and emphatically should not, apply to people who wage war on the nation! Otherwise, we run the additional risk of rendering meaningless the sacrifices of our policemen and soldiers who lay down their lives fighting terrorism on every given day!

And to date, the key perpetrators of the terrorist blasts that wracked the city, Yakub’s brother Tiger Memon, and underworld don Dawood Ibrahim, their henchmen, trained, armed, motivated by the ISI of Pakistan, are free, and at large. They are living comfortably abroad, allegedly in the custody of, but also under the protection of, Pakistan.

India, as a nation, has not, apparently, managed to take the battle to the enemy, the allegations of Indian involvement in fomenting violence in Karachi and Baluchistan unexcepted. If we have meddled in those places, perhaps we need to step it up, so that the battle of attrition is truly joined and tilted in India’s favour. We have, of course, reserved the right to retaliate of late, in a manner, scale, time and place of our own choosing, and again after the recent terrorist attack in Gurdaspur district in Punjab.

But, there is a decided gulf between a government that wants to take terrorism head on, and a liberal presence amongst civil society and some of its luminaries, that wants India to be lofty and take the moral high ground, even in the face of  repeated provocation. Mahatma Gandhi’s borrowed statement on an eye-for-an- eye is much quoted to justify this kind of pacifism.

However, because we are a diverse and pluralistic people, it may be best to let both schools of thought survive, contend, even thrive, in parallel! The liberals should be allowed to constitutionally amend capital punishment for a list of crimes that stop short of premeditated first degree murder in the common course.

But every act of treason against the country, and terrorism involving loss of life, should be handed over to a military trial that is swift and final, and determined to punish the guilty with summary execution.

For: Swarajyamag

(1,593 words)

July 30^th, 2015

Gautam Mukherjee

The Missing Cradle Of Innovation

The Missing Cradle Of Innovation

Prime Minister Narendra Modi will soon be visiting Silicon Valley, the first Indian prime minister since Nehru to visit California, or indeed the west coast of America.  

Going to a part of the country where India is, in reality, pretty remote to folks who are not ethnically South Asian, is fairly bold. California is mostly untroubled by and distant from the nuances of geopolitics that Washington DC specialises in, but is quintessentially American nevertheless. Though people seem laid back, productivity has not suffered. Silicon Valley has spawned some of  the US’s biggest multi-billion dollar corporations, all the more remarkable for having emerged out of the proverbial ‘garage start-up’. 

In Silicon Valley-ethnic Indians, from India, as opposed to people who ceremonially wear feathered headdresses, have distinguished themselves. Indians have actually done so in many fields in the US, doctoring, politicking, business, academics, management, finance, but most noticeably in what people call that high-growth digital technology ‘incubator’.

This fact needs to be contrasted with the recent observation of Mr.Narayana Murthy, lead founder of the iconic  IT company Infosys, that regrettably, not a single game-changing innovation, invention, or discovery, has come from India in the 69 years since independence.

To conclude that this is not due to the intellectual dullness of the Indian people is entirely reasonable, because Silicon Valley would probably not be what it is, without its Indian contingent. So, it must be a matter of atmosphere, style of education, opportunity, and encouragement, at one level, and financial incentive in the millions and billions of dollars, at another.

Silicon Valley has made scores of millionaires and billionaires out of very young people on the strength of their ideas, ramping them up swiftly, often within a single year, to multiple applications, assisted by a highly appreciative and savvy venture capital scenario, magnified manifold by a dynamic stock market. This, besides the NYSE, even has a separate listing vehicle and index of its own, namely NASDAQ, also in New York.

While the US is renowned for its high academic standards in its Ivy League colleges, other academic/research institutions, and some of the leading state run universities; Silicon Valley is populated by a large number of brilliant college drop-outs. But these are obviously people, iconoclasts perhaps, but with the vision to create game-changers and breakthroughs.

That collectively they have succeeded in making a massive global impact is a tribute to the spirit of American ingenuity, embedded no doubt in the very air and water and can-do culture of the country. It is this that has seen America surge ahead of the world in practically every field of endeavour.

Many of the Nobel laureates who are ethnic Indians, owe it to the time they have spent living and working in America. India, on its part, quite often, has educated these very same achievers through school and college and even post graduate levels, in its IITs and IIMs. But their best abilities have not flowered at home but ‘over there’.

So what can we do about it, to address Narayana Murthy’s implied question?

Probably not a lot, at least while we resident Indians are in transition, both with regard to our attitudes, our lack of original thinking, and our economic circumstances. In broad terms, we are both the ‘argumentative’ individualists we are, per Nobel laureate and welfare economist Amartya Sen, and slavishly conformist and hierarchical at the same time; based perhaps on our social organisation and history.

This is beginning to change amongst the youth most definitely, aspirational as they are and unburdened by our socialist history. That young people now constitute 65% of the population in India will certainly provoke a gain in momentum as the time goes on.

But the fact is, at the same time, that there is little or no social security, as it is understood in the West. There is no economic safety net, except perhaps at the subsistence level, that too most imperfectly. This circumstance breeds conformity, even fear, certainly not innovation, except amongst the stoutest of hearts.

On top of this, despite multiple methods of calculating what constitutes dire straits, more than 50% of our people are under pressure to just make a day-to-day living. The oft touted statistic of between 50 -60% of our population that lives in the rural areas and contributes only a modest 16-17% to the GDP, is crying out for urgent reorganisation – because, our countryside is spectacularly over-populated and under-productive.  

Out of 1.27 billion people today, no more than 1% are rich, comparable to the rich anywhere, and no more than 5% inclusive, belong to the upper middle class, with standards of living as good as, if not better, than their counterparts in the West.

Yet at the same time, with some 15 to 20 million new births every year, usually at the bottom of the pyramid, the struggling 50% of the population that includes the lower middle class, can, and do, afford servants in this country. This certainly eases our day to day burdens of drudgery, even as it continues to promote the dictation of the traditionalist in our psyches. However, many of us would not be keen to trade in our daily privileges, inequitable as they might be,  for a more self-reliant set up.

Traditionalists however, a nation full of them, cannot generally innovate. Our only hope to become here, at home, what we are in so distinguished a manner abroad, is to challenge our own systems and assumptions. We cannot do this without pain, both felt, and inflicted and so, the reluctance to sally forth, is understandable. 

As a multi-lingual collective, in a country that is sub-continental in its pluralism and diversity, we probably cannot muster the coherence, discipline and determination. This, despite several movements like the Arya Samaj and the Brahmo Samaj, both induced perhaps by the Anglican Church in British times. They, and other reformist movements, from time to time, have achieved some limited success in changing attitudes, manners and mores, to be sure, but clearly not enough.

But there is hope, about that which seemingly cannot come about as a social movement, might well be brought about politically, by the power of the ballot and by a visionary government that radically changes the situation on the ground.

The Modi government has been promising much. It has plans to get rid of the babu’s files with digitisation. It wants to reform agriculture towards much greater productivity, and supported by a distribution and materials handling backbone. Smart cities will be built and millions are expected to be housed in them. A massive defense industry is in the process of being built from scratch. Other infrastructure in power, ports, roads, green energy, nuclear power, modern mining, and so on, are being created.  

The intentions of this government, if brought to fruition, are indeed capable of changing the status quo beyond recognition. Of course, the vision must sustain the slings and arrows of vested interests that would destroy it, and the people must afford it the time to execute it.  This government will need much more than the five years of the current mandate. It will need to stretch into a decade or more, and others that come after it, have to carry the process forward.  

But, if all this happens, will be capable domestically of  the game- changing innovation that Narayana Murthy spoke of?  Logically extrapolating on the  unleashing of spirit, and possibilities it will bring about, as the American expression goes: ‘You bet!’

For: Swarajyamag

(1,243 words)

July 27^th, 2015

Gautam Mukherjee

Labour Reforms: Federated Consensus?

Labour Reforms:  Federated Consensus?

Labour Reform in India calls for a change in mind set from its staunchly socialist past. To come about, it must jettison its highly defensive anti-capitalist-pro-worker stance. The changed thinking needs to produce balanced legislation that helps the scaling up and facilitation of big and sophisticated manufacture, and the massive, well-paid employment it will engender.

In 1991, the infamous licence-permit raj that produced bizarre distortions too, was finally dismantled.  And now, the Modi government, with the first majority mandate in over 30 years, seeks to usher in many elements of long awaited stage two of the structural reforms.

In this, attracting enhanced foreign capital, relaxing rigid labour laws, easing land acquisition/purchase, quickening the pace of granting government permissions, bringing the country under a single general sales tax (GST) regime, freeing up space for the private sector in insurance, auctioning national assets to the highest bidder, are all of a piece.

In the matter of labour law reform so far, the most substantive beginning has been made at state level, with Rajasthan taking the lead, most notably its Factories Act, allowing establishments with up to 300 workers, from the previous 100, to unilaterally close down or dismiss workers; this without having to take the government’s prior permission. Maharashtra, Madhya Pradesh, Haryana and other BJP ruled states are likely to follow suit, much to the annoyance of the trade unions.

The central government, on its part, wants to merge the Trade Union Act, The Industrial Disputes Act and the Industrial Employment (Standing Orders) Act into a single law for industrial relations going forward. However, it is hamstrung because of inadequate strength in the Rajya Sabha. This makes it difficult to pass any contentious legislation without opposition support. And the opposition sees labour reform as pro-business and anti-worker.

So far therefore, the centre has only managed to amend the Apprentices Act 1961, to boost the future trained work force, and do away with some reporting and register-keeping functions.

At the 46^th Indian Labour Conference, which the prime minister inaugurated recently, he stated that future ‘changes in labour laws will be made with the concurrence of the unions’. This may have come from a desire not to open any new fronts as he braces for an expectedly stormy monsoon session of parliament. But it may nevertheless be a difficult, if not impossible, ambition to fulfil.

India does however have some of the most rigid labour legislation in the world. As a consequence, most manufacturers prefer to stay small. A 2009 statistic from McKinsey &Co. has an astounding 84% of Indian factories choosing to stay miniscule, even as manufacturing overall contributes just 16% to GDP out of the $ 2 trillion economy today.

This is tiny compared to China,  that is now slowing down, but has had 32% of its GDP which has reached $10-12 trillion, coming from manufacturing. And China had no more than 25% of its factories employing less than 50 people in 2009. But then, manufacturers in India are probably afraid to grow, given the rigours of our labour laws, plus other extensive and oppressive red tape.

The antipathy to labour reforms in manufacturing are immense, even though, in India, according to a recent Reuter report, ‘just 8% of manufacturing workers are in formal employment. The rest are short-term contractors who enjoy minimal security benefits’. This, no doubt is another distortion meant to get around impossible labour laws. The indignity and unfairness of this practice of appointing ‘contract workers’ without rights caused violent riots in Haryana not so long ago.

But the allergy to reform doesn’t stop with manufacturing organisations alone. The Indian Railways, India’s biggest employer, involved in providing a service and manufacturing/engineering/maintenance/catering etc. has run into an early wall of opposition at the suggestions of the Bibek Debroy Committee. This from the trade unions, employees, its controlling senior bureaucracy, all the way up to the Railway Board.

Ultimately, this government may have to make do with as much labour reform as it can implement in the states, with ‘labour’ matters conveniently placed in the concurrent list. For bigger things, it may have to wait for a majority in both houses of parliament, perhaps post 2019. 

For: The Quint

(695 words)

July 21^st, 2015

Gautam Mukherjee

Straws In The Wind Redux

Straws In The Wind Redux

Stock market veteran Shankar Sharma of First Global thinks many Indian small and midcap stocks are poised to return 100% growth over the next year, while large caps will give over a modest 15%, just a tad higher than fixed income, at a comparatively handsome 8 to 10 % .

Sharma said this in the backdrop of the crises in Greece and China, implying that, for the moment, India may gain rather than lose from the turmoil internationally. Shankar Sharma is usually known more for his bearish projections and close adherence to the Congress line politically.

He is to be remembered for being the early financier for Tehelka when it ran those spurious and intrusive stings during the Vajpayee administration.e He  And so, this refreshing and positive public outlook, coming from Sharma, is indeed a pleasant surprise.

Other major brokerages are confidently predicting a 10% rise in the main indices by March 2016, and the continuation of the ‘long term bull market’. There is a tentative renewal of interest in India from the FIIs, and the domestic institutional money, mainly from the reflated mutual funds, is also in evidence. People seem to be finding ‘pale green shoots’ appearing at a policy level, and feel that private investment must  therefore follow in one or two quarters from now. Some have made bold to expect another interest rate cut from the RBI in early August, citing lower wholesale price inflation.

What is definitely missing for now is a growth in company earnings. So, once again, the indices are running ahead on optimism rather than valuations, but still, the speculation here is tame compared to China.

The money market outlook, wherein India has enough reserves to pay for 11 months of imports at this time, predicts that the rupee may well slide a little, to 65 to the dollar, particularly if America raises interest rates. RBI governor Rajan is widely credited for managing the macro position of India’s finances very well, though industry is languishing, and complaining of very high interest rates.

While America is now on the mend, the economic survival of Europe is crucial to it. If the EU as a whole, or any of its less solvent constituents, goes under, it is America that will have to jump in to save it from drowning.   Such is the umbilical cord interdependency between the ‘old world’ and the ‘new’.

But no such obligation extends to China, way over there in Asia. And if it finds itself in continued trouble, it will just have to trim its ambitious sails and concentrate on surviving.

That China’s overall debt is in the region of $ 28 trillion, some three times the size of its economy, is of course, quite daunting. Most of the debt is to do with domestic real estate that is now no longer selling.

China may also find it difficult going forward, because its domestic consumption has not grown sufficiently to take up the slack from its collapsed export markets. Its infrastructure building, manufacturing and armament building capacities are also largely idle. China needs new and viable markets that can pay, and these are few and far between today.

The Chinese establishment may want to reassure the world that all is well, but the fact that Chinese stocks, owned over 90% by domestic players, have been soaring above their underlying values for all of the last eight years, is a consequence of massive speculation, and not company performance. Given the present situation, the Chinese currency too is likely to suffer great volatility if it is floated to join a basket of international currencies.

In Asia, it has all happened before, there is a déjà vu. It broke the backs of the so-called ‘Asian Tigers’ who had built their raging, double digit GDPs on the development of golf courses and luxury tourist resorts, till that vacuous business model collapsed.

In China, with both its property sector and financial markets in trouble, and its manufacturing cum export story finished, there may be a big bubble waiting to burst. In 2006, it happened in America, first with the housing bubble, followed by the financial markets, in 2008.

India, of course, is an exciting, primarily domestic opportunity, catering to 1.27 billion people, projected up to 1.50 billion by 2030. This internal appetite is far from met and is mouth-watering, rather more than a modest export performance, even with the much vaunted IT included.

This could change, of course, as the massive Make in India programme gains traction, particularly in defence manufacturing. This government wants to take up the share of manufacturing in the GDP from 12% to 25%.  But right now, and put another way, if India was a small domestic opportunity, with the same level of exports as it has currently, it would not figure in the global discourse at all.

The Indian IT capability is indeed impressive, both domestically and through people of Indian origin in Silicon Valley, but this is a human resource advantage, and many international IT companies have, and are, setting up wholly-owned establishments in India to leverage it. Besides, the buyers in Europe, America and Japan are themselves recovering from huge lows.

And yet, perhaps due to the halving of oil prices and the stepping up of government spending on infrastructure,  the IMF forecasts 7.5% GDP growth in this fiscal for India, a full half per cent above the China estimates.

But will India chug along reasonably unaffected by China slowing down and the EU struggling? It is, on balance, regarded as the ‘cleanest dirty shirt in the emerging market’. But how many dollars will flow in remains to be seen.

Iran too, coming out of its punitive sanctions after a decade, will keep the downward pressure on oil prices and afford new business opportunities for India.  But low oil prices will make it impossible for OPEC and other major oil producers elsewhere from dominating any discourse for a long time to come.

So who, or what, will rule the roost now, or is the world truly headed towards being governed by committee?

Lord Meghnad Desai starts off his new book named Hubris-Why economists failed to predict the crisis and how to avoid the next one, with: ‘Economics was born in a whirlwind of change’.

Today’s world is indeed changing faster than many of the powers-that-be can grasp! Too often, these yesterday people are applying their tried and tested poultices to scars, instead of to the fresh wounds.

We still take a year or more for a sanctioned project to begin implementation, for example. And we have a clutch of nearly a dozen or more TV 24x7 channels devoted to business, in English and the vernacular , almost as many in print and online, to tell us all the ways we can be difficult!

There is, of course, a substantial opportunity to mirror the renewed optimism on the Indian bourses. Just as the 2% to 5% of foreign portfolio investment jumped in blind into the opaque but multi-trillion dollar casino of the Chinese bourses because the real economy was then growing in double digits; the possibilities in India are massive too.

Right now, the government could work to fan this windfall optimism, a second wind, bestowed, after Modi’s election in 2014, with much bolder implementation on its many initiatives. So much so, that the many initiatives, cascading at us on a near daily basis, are being mocked, as if they were just fond fantasies. 

It is implementation that could be the tipping point, the credibility builder, and the force multiplier for the India story. Everyone is aware of the reformist and business friendly intent of the Modi administration. Apart from the tentacular and most resilient red-tape, India is far more transparent and boisterously democratic than most other countries in the first place. The problem is it still moves at a snail’s pace, no matter how often it protests otherwise, and how clever are its slogans.  

For: Swarajyamag

(1,324 words)

July 17^th, 2015

Gautam Mukherjee

A Reordering Of The Fates

A Reordering Of The Fates

Men of destiny, like prime minister Narendra Modi, seem to be carried about through the attending tumult, held aloft by the fates, and deposited on safe perches, from where they can make further advances on their agenda and vision.

This even as internal potential rivals, party dissidents, both overt and covert, are being hoisted on their own petard, leaving Modi, head and shoulders, clear, over them.

The media, particularly the melee that passes for TV debate, is, of course, howling for Modi’s response, lusting after his involvement, outraged at his silence, baying for a defence or explanation, demanding blame be laid, and the rolling of heads. There is quite a list of defendants after all, a variety of alleged wrong-doings, involving union ministers, chief ministers, MPs and MLAs.

Some people gain involuntarily in such adverse conditions, and Modi himself  certainly has. One could miss the silver lining quite easily however, given the  loudly voiced threats to the credibility and future of the Modi government. All of it however, refuses to come to terms with the fact that the reckoning of substance will not come till 2019, irrespective of the, possibly exaggerated, short term consequences.

So much clamour then, even as his detractors from within are routed, as if by the hand of God, without Modi himself  having had to lift a finger. In fact, battered and bruised as they are, their continued political survival is contingent on the prime minister’s support.  

German political scientist Friedrich Hegel, thought it was the bailiwick of certain nations, but only when their time had come, and at particular times in history, to lead the world, that comity of nations, and give structure to the collective ‘march of destiny’.

It was, to the political theorist, a process of passing the baton, perhaps as the  ancient Greeks did, to the Romans in hindsight. In a less complicated world of nation states, in a 19^th century dominated by Europe, this idea, difficult to understand as it is for its mysticism, appealed to the more imperial-minded.

But even if this were to be still so today, like an axiom; a nation, like a company, is only animated and brought to life by its leaders, and also, to some extent, by its contenders.

Narendra Modi then, is climbing his metaphorical mountain, attempting to  usher in a great prosperity without it sullying him, somewhat like a latter day Vivekananda in politics, and restructure the rules by which Indian governance is conducted. It is not easy for him to push this through, but neither is it easy for the opposition’s calumny and mud to stick.

So, Modi is headed towards the light, helped always by the fates. China, the biggest power in Asia, chooses this moment to start falling apart.  China,   that aspires to dominate the narrative of today’s world, a country that dwarfs India with its riches and might, is in sudden and steep decline. Its rate of growth is halved, making it difficult for its storied superstructure to thrive and its flag to  keep fluttering on high.

This, causing panic selling in its bourses, may  well send on some investment dollars into our own stock markets, but that is actually the small expected gain. The big one is that China will have to deal with India on a more equitable basis.

That is why Modi can make repeated polite demands of Xi Jinping, on the border issue, on its support for the renegade Lakhvi, on other matters, and receive a patient hearing. That is why Xi came to visit in the first place, and why Modi returned the call on. There are protestations of a new high in the Indo-Chinese relationship to boot, on the side lines of the BRICS meet.

This circumstance of China weakening perceptibly, has come about relatively early on Modi’s watch, even as he has been struggling with Chinese incursions on the borders, a huge trade imbalance, and pressure via a perpetually sabre-rattling Pakistan.

But, with growth rates of just about 6% per annum ,China is down to numbers it has not seen for thirty or more years. It is not enough to keep things going, and half of what it took to make it a massive $ 10 to $ 12 trillion economy.

China’s highly speculative and opaque stock market, cannot sustain the illusion of continued growth anymore. The rumours of a highly stressed banking system, idle infrastructure, empty housing estates, inadequate domestic demand,  state owned companies with red ink writ large, an artificially valued currency, has been, of course, doing the rounds for quite some time.

Still, at its present size, China’s economy is second only to that of the US, and its rapid shrinkage will have profound impact in the global economy.  

RBI Governor Raghuram Rajan recently predicted a possible global great depression unprecedented in its severity. He based it on the trend of competitive ‘quantitative easing’ or QE or fiscal stimulus in the West, which he said was a false growth chase, fuelled by money alone. It is unclear whether Rajan included China in his calculations.

But now, other analysts are saying, with Lehman it was a bank that couldn’t fail, but did. What happens when the second biggest country in economic terms begins to fail? After all, it is a debt trap once again that is responsible, just as it is in the EU as well.

China’s collapse cannot be total for now given its immense reserves, but even a great stumble will set off a tsunami alright. As one of the biggest importers and consumers of oil, for example, when China further moderates demand, in a petroleum market scenario already suffering from gluts and sharply declining prices, what exactly happens? Will a barrel of crude sell for $ 25? What will that do to the petroleum exporting countries? What will happen to the global currency markets? And to metals and commodities? India will benefit from lower prices all around, but just how badly will it affect other countries?

Today, it is being said by experts, that the threat of economic turmoil from Greece and other highly indebted economies such as Spain, Portugal, Italy, Ireland etc. in the EU, is dwarfed by the implosions being experienced in China.

In three weeks just past, China has lost 30% of the value of its stocks represented by over $ 3 trillion; and 50% of its listed stocks have suspended trade, even after a massive government bailout was put in place. Bloomberg says Chinese stocks are being sold off wherever in the world they are listed. Chinese millionaires are moving themselves and their money out of China.

Meanwhile, Hegel’s Europe is truly crumbling, albeit backstopped by a tremendous backing from the US. America, on its part, is going to be recovering from the crash of 2008 for quite some time yet, and there goes its plan to raise interest rates based on its nascent revival. But having to nanny Europe, for decades to come, with a meagre larder at home, is a daunting prospect for it.

Given the changing circumstances, the US has been forced to be more willing than ever before its short history, to share power with others. It is making up with Iran for example, even in the teeth of Saudi and Israeli objection.

It will, and is, treating a well behaved  In dia, even though it is just a $ 2 trillion worth of emerging economy, with tender care and respect, mostly shorn of past prejudices. After all, India is tagged on with the fastest growth rate in the world,  very significant now that China is faltering.

India, eager to join the developed world, has a new found leverage via recent geopolitical trends, and it will therefore have recourse to funds and technology like never before.   Its ambition to grow at double digits will not only fructify, but also sustain for decades to come, fuelled by pent up demand, particularly for infrastructure and massive domestic consumption needs.

Indian wages too are attractive, compared to those of China and other places, at the watershed of their development curves. India has a great deal of young and cheap trainable labour, and simultaneously a highly educated workforce at the top levels. It is seen to be capable of making sophisticated goods and components without too much supervision. It also speaks good English and has a highly sophisticated capacity to ramp up digitally and in IT software terms.

China’s formidable manufacturing, exporting and infrastructure building abilities will increasingly go a-begging, except perhaps in India, a country capable of paying its bills.

But we are just one country, growing from a low base, and so, the way things stand, it is only a matter of time before the overhanging avalanche continues down the slope, burying China’s dreams of world domination, at least for now.

If there is to be an Asian century in the 21^st , going forward, who will it properly belong to? At present the jury is out, but by 2019, it may have come to a decision.

The calculus elsewhere too is changing inexorably. Putin’s Russia, truncated from the omnibus USSR, sensing the decline and fall of the once impregnable West, is asking for respect, with a steely view to securing it in reality.

The time for dictation and one-sided perceptions of the political situation has  almost passed. The fates are reordering the world, and India under Modi stands to benefit.

 For: Swarajyamag

(1,570 words)
July 9^th, 2015
Gautam Mukherjee

 

Working To A Plan

Working To A Plan

Democratically elected leaders and the governments they form, in Europe, America, Latin America, Australia, Israel, Japan, Turkey, elsewhere, have often been plagued by inadequate elected strength of numbers in one or the other house of parliament.

This can happen at the start of an administration, on an inherited basis, or even because of change of a house’s majority position at any point: due to deaths of members, scheduled by-elections, conclusion of an incumbent’s term in office, and so on.

Sometimes this results in spectacles like the US Government unable to pay its running bills, because their House of Representatives, gone numerically to the other side, decides to flex its muscles.

It refuses to vote for a higher overdraft limit or ‘debt ceiling’ to accommodate the government’s fiscal obligations.  This confrontation neared breaking point famously in 2011, though, prudently, never since.  

The Republicans who were in a majority in the House of Representatives drove the Obama government to the wire, demanding extensive expenditure cuts in return for a positive vote.

President Obama, a ‘democrat’, the most powerful man in the world’s richest, most militarily advanced and powerful country, was left standing with his threat to let the government grind to a halt hovering in the air. He waited and watched the fiasco grind on.  But finally, the Republicans blinked first.

In other instances, there are coalition pressures, sometimes inclusive of a keenly negotiated rotating prime-ministership between two or more partners in the arrangement, as was the case in Israel.

But in all such difficult situations, thrown up by the dictates of a fragmented electorate, or even by the vagaries of parliamentary rules and procedures, the government is compelled, nonetheless to find its own way to deliver.

Prime Minister Narendra Modi, a BJP Prime Minister, achieving an outright majority for the BJP for the first time ever, and this after a highly personalised campaign, realises that the decimated Congress wants to destroy his credibility.

Plus there are elements in his own party, spear-headed by LK Advani, the former Home Minister and Deputy Prime Minister, who clearly wants to see Modi fail. However, too much should not be made of this trend, because it does not have a mass base, and is the natural disgruntlement that comes with a generational shift.

The Congress and most of the disparate Opposition with the likely exception of the TMC, the AIADMK, the BJD and a few others, are feeling threatened by the BJP gaining ground in their own constituencies and power bases. They will do their best to stay the course.

Part of the strategy is to block Modi’s legislative agenda. Another is to work hard to highlight any contentious issue, however trivial, in its most exaggerated avatar, to keep up a propaganda war.

With the forthcoming Monsoon Session of Parliament threatening to turn into a colossal waste of public money, what are the Government’s options on implementation?

Can it, for example, move ahead for a longer time with land acquisition operating currently under ordinance?  Likewise, can it roll out GST by April 2016, without the consent of so many states and the necessary parliamentary nods?

The answer is probably yes, if it proceeds piece-meal with those states which are agreeable and willing, and on terms broadly in harmony with the GST Bill. The same model could be used for other legislation that is stuck, even in future, working on the basis of a state law accepted by the centre via the President of India, rather than the other way around.

Some 370 acres of land has, in fact, been acquired under the ordinance, though most states are waiting to see what form the new Land Bill eventually takes. But it also means that those who want to get on with a blocked project can do so. In any case the modalities of compensation etc. need to be worked out at state level, for different cities, towns, districts and villages, and throughout its compass.

This relentlessness of spirit to move forward, will blunt the opposition’s objective of crippling the government. Theoretically, most of the BJP/NDA ruled states, currently 12 in number plus one union territory, could pull away, and find methods to bypass the motivated, and some might say undemocratic, parliamentary logjam.

It may not show, or be much talked about, but this government did create 2.75 lakh new jobs between July and December 2014, according to a  labour ministry survey. This is an 118% jump over the corresponding period from a year before.

The ultra-conservative RBI Governor Raghuram Rajan now frequently opines that the economy is reviving, and the pace can be boosted further with more structural reforms. He expects to make further cuts in the interest rate, perhaps in his next review in early August, based on the continued success of the ongoing monsoon.

On a broader canvas, the first year’s hectic engagement with the world is beginning to pay substantial dividend as the pledges start converting into investments; even as further pledges, particularly in defence manufacturing, keep rolling in. This, after all, is not only huge but unprecedented. The government has issued 56 licences to private entities to participate.

There is$650 million coming in from The World Bank by way of a soft loan for the Railway’s dedicated  East-West Freight Corridor.  This comes on top of $1.1 billion received from the same source last year, and a first tranche of  $ 975 million given out in 2011. So, this, at least, is going forward.

Modi’s earlier success with solar power in Gujarat is about to be boosted by $ 20 billion in investment from Japan’s Softbank to make state-of-the-art solar panels in India in collaboration with Taiwan’s Foxconn. The Modi government has decided to encourage the best foreign technology from anywhere to come make solar products in India. China’s Trina Solar is another contender likely to come in soon. All in all, India’s involvement with this green source of power is going in for a paradigm shift.

Our perennial drought and flood scenario every monsoon is sought to be addressed too. The government has recently approved the spending of  $ 7.9 billion over five years to expand areas under irrigation. And the first project to interlink rivers has also been initiated, with the Ken-Betwa link between neighbouring states of Uttar Pradesh and Madhya Pradesh, involving the building of a dam on the Ken in Bundelkhand, and a 221 km canal to reach the Betwa basin.

Several other river link projects are also in the preparatory stages, and when implemented, will transform this country’s water management, substantially reducing Indian farming’s dependence on rain.

Another clear-cut project in manufacturing that has matured is Canadian firm Bombardier’s project to manufacture rail coaches meant for Australia in India. This is canny, because India will, most likely, put in a bigger order than Australia before long.

The recent thrust on electronics under Digital India underlines the fact that India’s bill for electronics imports is only second to that for petroleum products. And if this were to be met domestically, through manufacture and upgraded services, it would also be most transformative. 

Not only would we save on imports but the modernisation of the Indian system would result in massive efficiencies brought on by the use of superior communications, data-sharing, better equipment - delivering speed, cost-savings and multiple other benefits of technology. A number of key domestic and foreign business houses have shown keen interest and have pledged huge sums of money towards its realisation.

Many long stuck road projects, such as the storied  Kundli-Manesar-Palwal highway, now in six lanes, up from the earlier 4, have begun to race towards completion.

Adani, perceived to be close to Modi, is going to radically modernise bought-out ports on the Eastern seaboard.

In diplomatic terms, the new pilgrimage route to Mansarovar,  swiftly opened by China, will cut travel time, from at least a week to two days, for most ordinary pilgrims. There are indications that border talks with China, languishing for decades, will also be given a fresh impetus.

President Vladimir Putin of Russia recently alluded to the fact that their own border issues with China, pending for 40 years, now stands settled. In our own case, the Modi government has managed to conclude a long-standing border situation with Bangladesh, earning India considerable goodwill. Myanmar too is cooperating with India in the curbing of cross-border terrorism.

There are many such examples of substantial gain and change that the Modi government has been already able to bring about despite the shrill noise. The GDP rates are up, and 8 to 10 per cent annual rates may not be very far away.

And as these successes mount in number and importance, together they have the potential to dwarf and render ineffective the out-dated negative politics of obstruction and vilification being pursued by a despairing but feisty opposition. 2019 may not be seized on the strength of old slogans by any side. First, any contender will have to be more promising than Modi’s track record by then.

It may be an old fashioned idea, but it has always served NaMo well.

For: Swarajyamag

(1, 515 words)

July 3^rd, 2015

Gautam Mukherjee