The Grand Shift From Socialism To The Market Economy

The Grand Shift From Socialism To The Market Economy

All things are possible now that paralysing ‘Coalition Dharma’ and the ravages of a hypocritical Socialism have been turfed out by the wise Indian electorate. Public intellectuals, Captains of Industry, incrementalists, Society chatterati, continuity masters, the battered and bruised Opposition, masses of turncoats who aver they always saw the Reformer in Modi, and almost everyone else, can’t stop giving the new Government unsolicited but mostly well-meaning advice.

But the current NDA Government is likely to be several steps ahead of all these external elements. Narendra Modi has undertaken a hard slog, a veritable tapasya, in arriving at this pinnacle in his political career, and is determined to use it to transform India as we know it.

This will be partially demonstrated via his Government’s first budget, being dubbed the ‘Super Budget’ in certain descriptions. This is expected to outline just how vast his vision for this country really is. He has already spoken of a 10 year plan to eradicate poverty. This indicates the scope of works coming up, and all assessments that try to link the future with the past will prove to be much mistaken.

The difference is, this time, poverty elimination as a target is not mere rhetoric of the garibi hatao variety. It definitely won’t be more welfarism, but we can expect the NDA to set out a road map in the budget with highly empowering opportunities and facilities for the poor.

Meanwhile, the new Government is already working like a breath of fresh air, with very few minor missteps so far. I&B Minister Prakash Javadekar has gone on record wondering if his Ministry is necessary anymore with an anti-propagandist honesty never seen before.  And he has promised to clear 16 months of backlog in the Environment Ministry he also heads, that of the infamous ‘Jayanti Tax’ blockage, but in the next sixteen weeks.

The anachronistic and ponderous USSR-style Government of India is being dismantled. Since May the 16^th when the numbers delivered a majority government after 30 years, the considerable action to establish India’s version of the market economy began immediately. The plethora of initiatives that have come over the last month are distinctive in both style and substance.

The never before invitation to the SAARC heads-of-state for the swearing in ceremony of the NDA was a first. So was the quick visit to Bhutan before its 22^nd round of talks with China.

The clearance of at least two defence projects, the long pending Naval Port at Karwar and the listening and monitoring post in the Andamans, was swiftly undertaken. Other civilian and commercial projects, long stuck, were put on a time-bound roster, online submissions and approvals are being introduced, and several pending road projects, looked after by Minister Nitin Gadkari, have been cleared for implementation.

The abolition of the dozens of GOM’s and the EGOMs that slowed down legislation and decision making to a snail’s pace has come not a minute too soon. The many Cabinet Committees used to playing ringa-ringa-roses and pass-the-parcel at the tax payers’ expense too are gone.

The total count of NDA ministers has been pruned drastically, while several separate ministries have been grouped together ergonomically. The UPA’s ex-MPS and ex-ministers have been asked to expeditiously vacate their Government bungalows and flats.   Scam–tainted UPA appointed Governors have been asked to quit, and several officials such as those manning the NDMA, disastrously at that, have been shown the door.

The masses of people enjoying expensive Government security are being reviewed. The IB has gone to work on NGOs that are out to make trouble for the Government and its development initiatives. The CBI, no longer the ‘caged parrot’ is out catching corrupt mice once again. It is as if India, the sleeping beauty of the fairy tale, has woken up from its evil spell, and the whole ‘castle’ is coming back to life.

The Planning Commission, long seen to be more or less useless, has been divested of its financial powers, and the spurious distinction between plan and non-plan Government expenditure is being abolished too. Centralised five year plans, another USSR inspired relic, are largely irrelevant in the age of real-time monitoring.

Railway passenger and freight fares/rates have been hiked at last to save the vital Indian Railways from impending bankruptcy. The APMC Act will be reviewed. Hoarders of fruit, vegetables, potatoes, onions etc. have been warned. Air India, disgracefully inefficient, will be privatised like Lufthansa and British Airways before it. Other PSUs will have to pick up their game or be sold along with their considerable physical assets. The determined spirit of Margaret Thatcher may have come to visit New Delhi, along with that of the Go-To-China visionary Richard Milhous Nixon.

Bureaucrats have been gathered together by the Prime Minister and told to take decisions without fear or favour. Ministers have been asked to deliver in a time-bound fashion. Nepotism and corruption is being checked. Offices and Government establishments have been instructed to clean up and junkets and jamborees are not allowed. Officials and ministers alike are required to put in complete and long hours of work.  First-time Parliamentarians are to be officially taught parliamentary etiquette.

Indications are that a strong attempt will be made to cut back on subsidies that weaken the national balance sheet. The various welfare programmes running on will be tweaked for efficacy, and the gargantuan Food Bill may be put on hold till the economy revives.

The Government will undertake a massive infrastructure building programme, inclusive of a thorough modernisation of Indian Railways. Millions of new jobs will be created in the process. Taxes will be cut along with interest rates. Business and Industry will receive a strong boost and FDI will pour in.  FII investment limits in the stock markets will be enhanced. The $300 billion Indian Defence Sector in armaments purchase terms, will attract massive FDI investment and turn into a potent export earner in due course.

All this has surfaced in just one month. After 1991, it is certainly 2014 that will go down in the economic history of modern India as the year of the great leap forward, Modi style.

(1,020 words)

June 22^nd, 2014

Gautam Mukherjee

BOOK REVIEW-The Psychology Of Making Money

BOOK REVIEW

Name:      MONEY MANIA-Booms, Panics, and busts from Ancient Rome to the great meltdown

Author:     BOB SWARUP

Publisher: BLOOMSBURY INDIA, 2014

Price:        Paperback, Rs.499/-

The Psychology Of Making Money

Bob Swarup, a London-based expert on financial markets and investments, educated at Cambridge and Imperial College, has written a fascinating book on money management, with a broad and flamboyant sweep.

It blends hard-nosed financial investment theory, some lateral commentary from experience, the quoting of economists, financial history from the glorious reign of the Roman Caesars, that of ancient Greece, the more recent boom and bust cycles in Japan, Europe in the World War years etc., and the human psychology of people in relationship to money the world over.

Swarup has left out the latest 2007 onwards global bust, except in passing, as much has already been written about it. But, he seems to imply, the historical markers, the essential thinking that fuels a boom and sows the seeds of the eventual bust, are no different in this ‘sub-prime crisis’ either.

The title of this book, and Swarup’s central thesis, suggests a somewhat manic, irrational approach to the pursuit of riches, with dollops of exuberant money-lending, while most sober analyses and business/financial investment models are cautious and cleave to the majority view. The author explains, most of us fear ‘social exclusion’, and find it very difficult to ‘divorce emotion from principles and actions’. And the way we view financial opportunities are through the very same emotional prisms of wanting to belong to the circle of winners.

Human psychology ‘lends itself naturally to boom and bust’ says Swarup. ‘The first ever documented sovereign default was in the fourth century B.C. in ancient Greece’, which was an aggregate of city states at the time, ‘when ten Greek states defaulted on their debt to the temple of Apollo at Delos’.   Even back then, the idea was to leverage growth through debt, and the over-optimism involved led to the default.

Swarup cites economist Hyman Minsky ‘who saw fragility and financial instability as intrinsic to any economy that contained banks and debt’. Minsky’s protégé Charles Kindleberger wrote, in 1978, what Swarup calls ‘the definitive book on manias and panics’. He quotes Kindleberger: ‘Speculation for capital gains leads away from normal, rational behaviour to what has been described as a “mania” or a “bubble”. The word “mania” emphasizes irrationality…’

Indeed, even a genius, the  renowned physicist Sir Isaac Newton lost a fortune, 20,000 pounds sterling, the equivalent of $ 5 million today, by speculating in ‘the South Sea Bubble of 1720’.

Some booms and busts had a lot to do with the waxing and waning of political power. The 16^th century ‘was defined’, says Swarup, ‘by the rise of Protestantism and the increasingly violent confrontations between the Protestant north and Catholic south of Europe’.  These skirmishes, competitions and wars were funded with borrowed money from bankers to the kings, such as the German family, with the interesting name of Fugger.  But even royalty was far from immune to the boom and bust cycle. Catholic Spain, one of the wealthiest, ‘managed to default seven times over the course of the sixteenth and early seventeenth centuries’.

Swarup writes of ‘entrepreneurs and speculators’ who make large sums of money as ‘being among the first to a new party’, in reference to the early-bird phenomenon. And he cites ‘cascading dynamics’ at the other end of the cycle, when a bust takes place. This is due to something that mimics a law of physics. It is the ‘long history of endlessly repeated cycles-optimism, arrogance, greed, fear and capitulation’.

‘Speculation’, writes Swarup, ‘needs money’, and ‘conquers sense. Ego denies the hand of luck and instead thanks skill, knowledge, and prescience. Where there is insufficient money, people find ways of creating more-the history of finance is replete with innovations such as bills of exchange, bonds, paper money, and derivatives’.

If economics was largely population driven in the ancient and old world; ‘post 1700’, writes Swarup, ‘The Industrial Revolution unleashed a surge in productivity thanks to technological innovation… thereafter, economic growth appeared to decouple from population growth’.

The world became increasingly more complex. Long term-planning and management was given short shrift. Most Governments and those that ran them tended to have a short-term outlook.  As a consequence, there were problems that were routinely swept under the carpet. Swarup calls it a ‘disequilibrium beneath the surface’, that has no choice but to erupt from time to time.

But, writes Swarup significantly, given the financial  multiples involved: ‘Money did not birth credit’, and, ‘was not the natural evolution of bartering but rather the convenient medium of borrowing, lending and taxing.  For example, ‘the actual   base amount of money in a system may be very small…the United States had a monetary base of about $ 3 trillion in 2012’, meaning, of course, just the physical notes and coins, ‘but if we add in all the credit that is out there…it exceeds $51 trillion’ and that is without counting the derivatives’.

(802 words)

June 21^st, 2014

Gautam Mukherjee

Beyond The Vagaries Of Oil Prices

Beyond The Vagaries Of Oil Prices

What does the ongoing unrest in Iraq mean for the fledgling Modi Government? It certainly means higher petrol, diesel, jet-fuel, gas and kerosene prices in the near term, sharply higher subsidy burdens, already at $ 27 billion, and cost-push inflation due to increased cost of transportation.

However, for one reason or the other, including wars and tension in the Middle East, petroleum prices have been elevated throughout the global economic downturn since 2008. It defeated the strategists in the UPA, who did nothing to combat its pressures.  But this is a problem that is unlikely to abate, and must be worked into the Modi Government’s plans to revive the economy.

This particular ISIS led emergency in Iraq could well blow over, buckling under threats of direct support both from the US and Iran, with several US warships taking up position. And also, probable lack of funding from Al Qaida in the longer term, because of too many commitments to global jihad. But the simmering discontent and instability will continue, in the signature form of terrorist strikes, assassinations, bombings and guerrilla warfare.

The ‘Arab Spring’ type movements against authoritarian regimes, towards a greater say if not quite democracy, in parallel to the fundamentalist movements will keep the region in turmoil.

Extremist organisations, with their anti-Semitic, anti-Monarchist, anti-Hindu, anti-Christian, anti-moderate Islam, anti-Capitalist positions, such as Al Qaida, the Afghan and Pakistani Taliban, the Lashkar-e-Taiba etc. are spread out all over the Islamic world. In the Middle East there are constant eruptions, part ‘liberation’ movement, part terrorist subversion, including those in Libya, Egypt, Tunisia, Morocco.

Others thrive in Syria, Lebanon, Palestine, Iraq, Sudan, Ethiopia, Chad, and Iran, amongst others. Next door in nuclear Pakistan, and Afghanistan too, there are serious and dangerous jihadist movements.   All these together will keep up the pressure on the pricing of petroleum from the OPEC region, as well as its uninterrupted availability.

The situation suggests, at a minimum, that inflationary pressure is a given constant, from the 75 per cent or so of our imported petroleum. Iraq is only second to Saudi Arabia in terms of our suppliers, and accounts for nearly 20 per cent of our oil imports.

We can, of course, diversify our oil imports from sources outside the Middle East - from Russia, Kazakhistan, South America, but at what cost?

In addition, to prevent it playing havoc in our economy, we must do as much as possible to strengthen our balance sheet, particularly with the GDP at record lows. And perhaps Prime Minister Narendra Modi was hinting at this when he spoke of a ‘bitter pill’ coming up with regard to the economy.

We need to do away with subsidies on oil, gas and fertilizers, to reduce our fiscal deficits by several lakh crores of rupees or that estimate of $27 billion and climbing. On top of our farm support prices and many welfare schemes, it is ballooning the fiscal deficit to dangerous levels, constantly weakening our currency, and increasing the current account deficit too.

Without urgent and firm action on the part of the Indian Government, it will scare away FDI, and result in an international sovereign ratings downgrade to ‘junk’ status investment-wise. This, in turn, will make foreign borrowing all but impossible.

We cannot do very much to reduce our dependence on imports of petroleum products in the absence of adequate discoveries in our own country though we must keep trying. We can, and must, get on with steps that can secure our position to some extent.

One such step is to fast track the Iran-India undersea gas pipeline. On completion, it is likely to give us gas at affordable prices over the long term. Another is to accelerate the public-private help towards developing Chabahar Port in Eastern Iran. This will give India preference to receive Iranian oil too on favourable terms. Third is to ramp up our petroleum refining capacities so that we can process more of this Gulf and Middle Eastern crude for domestic and foreign use. Fourth is to reduce our dependence on petroleum in favour of domestic coal, nuclear and other alternative energies wherever possible. Fifth is to cut as many subsidies as possible in the interests of creating a more robust national economy.

All this, coupled with massive public spending, partly via FDI, and also from private-public partnerships, on our outdated infrastructure, can result in millions of new jobs and a sharp fillip to the GDP growth. Reviving the agriculture and construction sectors that account for 17 per cent each of the economy, again with infrastructure upgrades and fresh investment, will enthuse hundreds of millions of people employed in these two areas. Opening up the defence sector to 100 per cent FDI will also be most encouraging both for our security future and export earnings. Raising foreign investment caps on the debt market and in as many sectors as possible will be well received, while deepening and widening the economy. And lastly, freeing the labour market from hire and fire restrictions will encourage investment, improve efficiency, and put paid to trade union militancy.

Despite all this, we cannot help endure a measure of continued inflation because of high oil bills, but can further offset some of its ravages by lowering interest costs and taxes, thereby stimulating investment in business and industry, and creating an atmosphere of renewed optimism.    

(890 words)

May 15^th, 2014

Gautam Mukherjee

Inflation Can Only Be Tamed With Growth And Modernisation

Inflation Can Only Be Tamed With Growth And Modernisation

It is heartening to see the Modi Government off to a spectacular start, quickly adopting a multi-pronged approach to growth and development, rather than the earlier administration’s obsession with inflation alone.  It is worth noting, among all the attention paid to big business, industry, security, defence, education, health, reformation of the judiciary, alternative energy, joining of rivers, roads, bullet trains, freight corridors, highways,  public-private participation etc.  that the new Government is laying a great deal of emphasis on measures to benefit the rural poor.

And this is to be done, not by way of subsidies and sops, but by engendering and sponsoring growth, modernisation, opportunity, broad-band and physical connectivity, plus a comprehensive upgrading of infrastructure.

It can safely be said that no President of India before Pranab Mukherjee has had the privilege to make quite such a bold statement of intent to the joint houses of parliament in the 67 years of our sojourn as an independent nation.

Inflation, both general and in food prices, in the previous regime, had a good deal to do with its huge and  mismanaged fiscal and current account deficits, the sharp rise in the cost of imported petroleum products, combined with a total neglect of all the growth drivers. That is why, because of the mix of domestic and international factors that were outside the abilities of the UPA Government to counter, that inflation stayed up, despite very tight monetary measures taken. Strangling an economy growing at nearly 9 per cent in GDP when UPA inherited it from the earlier NDA Government, was a colossal blunder in strategic terms.

Because, without promoting growth, the economy soon grows sick, and can even die. See what happened to the once thriving city of Detroit, once the hub and centre of the American automobile industry. As a country, one of the potentially strongest in the world, India too has been driven into stagflation and decline. There is no time to lose in reversing the economic drift spiraling ever downwards, and Prime Minister Narendra Modi knows it.

The Modi Government’s emphasis on rapidly modernising rural infrastructure, extensive irrigation and water management, the expansion of the energy sector, inclusive of hydro, thermal, solar, wind and nuclear power, combined with targeted information technology, is going to transform the agriculture sector and lead to great efficiencies. The reorganisation of the farm support systems, credits, storage, materials handling, transportation, food processing, cold-chain development etc. will improve yields and eliminate criminal wastage in a nation where the poor still go hungry.

All this together, along with modern retailing, will bring down food prices for good. It is the strength of comprehensive action, working on all the lacunae at the same time, that can and will work.

This approach has never been tried before, with piece-meal initiatives taken at best, and that is why the Indian agriculture sector has not benefited ever since the Green Revolution increased outputs dramatically, and made us food self-sufficient. There was a spate of mechanisation after that in some states to be sure, the introduction of tractors and combine harvesters and the like, and then we ran out of steam and ideas.

That is, till now. The President’s address outlined a ten year plan to modernise the country on all fronts with the agricultural sector playing an important part. The neglect of this vitally important contributor to the nation, in a predominantly agricultural country physically, has declined in the reckoning when it comes to contributions to the GDP, or the prosperity of the people whose effort feeds us all. Today the share of agriculture, including forestry and fisheries, on which at least 600 million Indians, some 51 per cent of the population, depend for their livelihood, has declined to only 17 per cent of GDP.

Modi has declared his Government will bring urban facilities to rural areas, even as the other 50 odd per cent of Indians are now city dwellers. His Government plans to build 100 new ‘smart’ cities to take care of the great rural-urban divide. Waste land will be identified, mapped and tapped for the purpose.

The other major difference in tone and tenor, on all initiatives coming thick and fast from this brand new Government, is epitomised by the motto ‘skill, scale and speed’, devised by NaMo himself. India has never dared to think big in the past, nor thought of competing with China in any manner, but this is set to change. Speed too has never been the strongest suit of the Government of India, and it has long been known that our national skills need updation and upgradation too. The NDA plan to introduce IIMs and IITs and AIIMSs in every state is not only audacious,but long overdue.

There is little doubt that the Modi Government, dynamic, willing to innovate and do things differently, will succeed in all its endeavours. Early days though these  are, people both in India and abroad are clear that optimism is once again in the air, and India has been woken up from its dormancy and dissatisfaction.

(839 words)

May 10^th, 2014

Gautam Mukherjee

The Start Of An Economic Tsunami

The Start Of An Economic Tsunami

Poverty is not socialism. To be rich is glorious.

Deng Xiaoping

Twenty three years ago, in 1991, the first stage of India’s economic liberation, the unshackling from failed socialist ideas, took place for the first time. It occurred in the context of a balance of payments crisis, enabling the Congress Government led by then Prime Minister PV Narasimha Rao and his Finance Minister Manmohan Singh, to take some bold steps.

Unfortunately, instead of pressing on from that excellent start that helped India to unprecedented high speed and consistent growth over a number of years; the follow through never came via the successor regimes. Still, it changed India so substantially that many features of an earlier time, full of shortages, restrictions and red tape, largely disappeared for good.

But things did not proceed apace as expected. Instead, there was a slide back to the old ways. This was to the general disappointment of business and industry and the investment community both domestic and international. Myths of growth that benefited the few with nothing for the majority were belied by the statistics, but still remained rife in the Liberal-Left political discourse.

Whilst what was done at first was not rolled back, neither was it built upon to quicken the pace of India’s development. This was even most marked in the ten UPA years just past, reminiscent, and almost a throwback to the low growth Indira Gandhi era, which resulted in confusing the country’s policies and initiatives. And slowed the economy to a decade low near standstill.

This year 2014, counting from 16^th May 2014, when the electrifying election results came in, has changed our possibilities, and is another watershed. This date, will, without doubt, be written up twenty years from now to mark the start of the Second stage of Indian Reforms.

This new stage in our modernisation, will, at last, fulfill the promise of 1991, but this time in transformational and continuous motion. Like the initiatives of the visionary Deng Xiaoping of China,  Narendra Modi’s bold developmental policies will take this country into the first rank of  nations while carrying all of its people into prosperity.

Speed, scale, skill, and boldness, is of the essence, for we have lost much time. And judging from the plethora of initiatives announced in just two weeks of Narendra Modi’s Government, we need not worry on this account. Prime Minister Narendra Modi is aware that his grace and favour period, the ‘honeymoon’ interlude, will be short. The millions of young people, his impatient fans and voters, want to see quick results. Having said that, the mandate ensures a free hand and the wherewithal to do things his way.

Nevertheless, of the many pressing demands on a prime minister’s time and attention, top emphasis must be given to the revival of the economy. Winning the several Assembly elections coming up is very important, as are various security issues and other aspects of good governance. Many of these broader concerns and emphases have been recently outlined in the President’s address to the joint houses of Parliament. But the money must be urgently seen to start flowing again, like life-giving water,  into the stalled and parched economy. This, through the revival of domestic and foreign direct investment, in a manner that mimics the ramped up FII into the stock and debt markets which has  swelled in anticipation of the expected growth over the next year and more.  

The President’s address has indeed laid out a road map of exciting and far reaching intentions. The Annual Budget, coming in July, is expected to demonstrate and delineate a strong reformist flavor and reinforce the bullish excitement of a country and economy on the move. This will enthuse business, industry, the prospective and existing foreign investor, security analysts, international rating agencies, think tanks, foreign governments, private industry, the middle class, urban and rural people, farmers, students, job seekers etc. and mark a departure from the timidity and sluggishness of the past government.

With an excellent symbolic start made with the SAARC countries already, a number of foreign visits are already scheduled in short order. The visit to Bhutan may be to underscore India’s commitment to this strategically located nation, and economically important too for its robust electricity generation, actual and potential.

Substantial and specific results are expected from Modi’s forthcoming visit and interactions in Japan. This particularly on the projects stalled in the Delhi-Mumbai Industrial Corridor.  

And though there was no mention of Iran in the Presidential address, it must be noted that there has already been an early meeting with Oman’s foreign Minister, who reportedly came about reviving the Iran-India Gas Pipeline project hanging fire for long.  Israel, another country not mentioned in the President’s Address, could do much to contribute to the 100 per cent in Defence Production initiative.

Similarly, the swift meetings with the Chinese Foreign Minister, followed by one expected with President Xi during the BRICS Summit scheduled for August, should yield substantial news - on the modernisation of the Indian Railways for example, high speed trains, other infrastructure, and perhaps even defence related investment.

Modi’s meeting with President Obama, slated for September end, is being viewed as a fresh start to the stuck ‘strategic’ relationship between the two great democracies. Some reports suggest that the US will seize the initiative and set India on its path to becoming an ‘$10 trillion economy’, that is, five time our current size. This has strategic geo-political implications of course, but does America have the consistency of purpose to execute this?  The Modi Government, in any event, must be mindful of the momentum it must generate. It cannot afford to be stymied by the typical US ifs and buts when it comes to execution.  

The proposed Vibrant India Summit, chalked in for November, should do great things on the national platform going by the success of the Vibrant Gujarat Summits over several years. The proposal to deepen and widen the stock markets to absorb more FII is also most welcome, and reports that suggest the Debt Market ceiling for FII in Government Bonds is to be raised  will also be enthusiastically received.

The expectations raised by Narendra Modi’s extraordinary and visionary election campaign are very high. By the end of just 100 days of Modi’s governance, a self-imposed thing,  he fully intends to let the public feel, believe, and trust, that his Government is going to transform their lives.  

It is the credibility of Modi’s promises, he knows, the strength of his personal determination and calibre that is at stake; but Narendra Modi seems undaunted by the prospect, and continues to exude supreme confidence.

(1,104 words)

May 9^th, 2014

Gautam Mukherjee

The Almighty Greenback

BOOK REVIEW

Name:    THE DOLLAR TRAP

Author:   Eswar S. Prasad

Publisher:  PORTFOLIO Penguin, 2014.

The Almighty Greenback

The highly accomplished author of this meditation upon the US dollar early on makes the point that the dollar is the world’s reserve currency and ‘store of value’, even in these economically troubled times, and likely to stay preeminent going forward.

And that though the dollar is going to continue to depreciate against other currencies, particularly of countries that grow their economies more rapidly, it is trusted enough by nations around the globe to hold more than $5.6 trillion of the US Sovereign Debt.  

The second largest economy after the US, namely China, holds the highest amount of  US Debt, about $ 750 billion. The amount of notes the US prints continuously to provide liquidity to its economy at near zero per cent interest rates, does fuel domestic and global inflation. But post the financial crisis of 2008, other economies, those of Europe and other developed countries, are considered shakier than America’s, even with its $16.8 trillion gross federal debt growing apace.

But the ‘dynamics’ of public debt in advanced economies is expected to inexorably rise to $41 trillion by 2017, double the levels of 2007, before the US housing bubble burst, and brought on the global economic crisis in the first place. This represents an 81 per cent debt to GDP relationship, up from an already high 48 per cent to GDP in 2007.

The emerging markets, such as India, have a happier scenario, but FDI capital tends to flow out from poorer countries to richer ones. This Prasad calls ‘The Paradox of Uphill Capital Flows’. Reasons include untrained and unproductive labour in emerging countries, political instability, shallow capital markets, etc. There are other paradoxes too. Americans, much fewer in overall numbers, are ‘on average about eight times richer than the Chinese. Yet, it is the US that has been running a massive current account deficit’. Some advanced countries, led by the US, tend to be ‘net importers of capital’ to finance both their consumption and investment. And there are many individuals, institutions and governments, keen to lend to the Americans.

In the emerging markets, India and Turkey also import foreign capital in significant quantity. China, rather uniquely, is not only consistently ‘current account surplus’, but exports its capital extensively, accounting for 16 per cent of the total global capital exported, about $2.2 trillion in the period 2000-2012.

The economic performance gap between the debt-laden West and the more efficient emerging nations is widening, and Prasad suggests there will be a day of reckoning perhaps, in the relatively distant future.  For now, the statistics reveal quite a lot. The debt to GDP ratio in emerging markets was 29 per cent in 2007, but there is a projected decline to about 23 per cent of GDP in 2017. So emerging markets will do steadily better than advanced economies as the 21^st century progresses, signalling a ‘transformative shift in the balance of economic power’.

In 2007, the emerging markets accounted for 25 per cent of global GDP and 17 per cent of global debt, writes Prasad. In 2017, these same countries are expected to produce 40 per cent of global GDP and account for just 16 per cent of global debt.

And yet, the world feels ‘safe’ keeping its surpluses, or even its foreign exchange reserves, in US Treasury Bonds. This is because the entire developed world is closely tied to the US overseas economy, and there is effectively no other reserve currency of choice that derives succour from other sources worth the mention.

The Chinese Renminbi is not as yet even a theoretical alternative reserve currency, because the US has democratic institutions and a legal framework that the world sees as transparent and effective, versus the opacity of the Chinese system, run by a Communist Party without checks and balances.    

So, despite America being financially the most profligate nation of all, consuming far more than it produces, it is bolstered by the faith of the whole world fearing an economic holocaust should the current order collapse.

Perhaps, some Utopians have suggested, the world should have a single global currency so that currency volatility is no longer a problem, and cross border transactional costs are eliminated. But the Eurozone has already demonstrated its downside, where the weakest links have to be bailed out by the strongest for the zone’s mutual survival, whatever be the reasons. Also, an independent monetary policy becomes impossible, and who should run this global currency after all?

The United Nations, for example, meant to have been created as an equitable institution for all the nations of the world, is in reality mostly financed, housed and dominated by the United States. Similarly, the US dollar is most prized, over $ 750 billion of it in hard currency is held by people around the world, because it represents abiding value to them.

(803 words)

June 5^th, 2014

Gautam Mukherjee

Miss Otis Regrets

Miss Otis Regrets

Cole Porter wrote a haunting song in 1934 about one Miss Otis who could not come to lunch because of a grisly back story. But it is paradoxically a very genteel and poignant song, with the nastiness of the back story quietly peeking through.

The story of India’s economic mismanagement via the erstwhile trio in the Finance Ministry, The Planning Commission and The RBI, with the PMO just watching mutely, has been truly appalling. All these institutions, headed by supposedly eminent and capable people demonstrated a spectacular incompetence not known in the post 1991 scenario.

They were, in hindsight, all out of touch with reality, all hugely impractical, wrong in trying to force -feed socialism after its expiry date, ignoring the engines of growth and development, while stoking and compounding each other’s folly. It was indeed enough to form quite the ghastly back story.

The remaining overlap now is only in the RBI, for the other captains have been turfed out by the electoral tsunami. The Reserve Bank is still topped by a celebrated and much qualified governor with strangely regressive views.

The RBI has for long, since 2008, been a one trick pony focused solely on curbing inflation. This took a vibrant economy and killed it slowly in anticipation of an overheating that never actually came. While keeping prices down may be a laudable objective, a ham-fistedly tight monetary policy from the RBI, combined with Government welfarism paid for with deficits, is hardly a winning combination. Still, it is all that has gone on with little or no success to show for all the pain, either by way of lower inflation, or the plight of the poor salvaged.

What has happened instead, in the bitter-pill process, is that a once vibrant economy has been reduced to a state of stagflation. Industry has almost died, and to prove it posts negative growth statistics month after month. Job creation is arrested, and the job market has actually been shrinking. This, even as lakhs of qualified young people from our vaunted ‘demographic dividend’ come on stream every year.

It was speculated, once the election results came in, that the highly qualified present incumbent at the RBI, Governor Raghuram Rajan would have to blend his arcane American style central banker nostrums to tame inflation, with those that unequivocally promote growth. And that too even before he got around to signing any currency notes for posterity.

But having seen the size and heft of the BJP/NDA’s electoral mandate, the governor has decided to play ball, however reluctantly. He has, willy-nilly, stopped hiking interest rates in his latest review, and started loosening his grip on liquidity, albeit in much too timid a fashion to delight anyone in industry or commerce. But yes, cutting the Statutory Liquidity Ratio (SLR), the amount the banks must keep in Government bonds, by a half per cent, will release some Rs. 39,000 crores for lending.

Despite the rigmarole and keeping up of appearances, the autonomy of the RBI is something of a myth, because no governor of the RBI can in practical terms stand apart.  The RBI is allowed to do the bidding of the Government of the day, no more, no less. And this Government, is determined to kick-start the economy to bring in the promised ‘acche din’ asap and in no uncertain terms.

The right place to fix inflation may well be outside the purview of the RBI, down in the engine rooms of the fiscal deficit. Common knowledge has it that the fiscal deficit, the difference between the expenditure of the Government, at 30 per cent of GDP, outstrips the revenue all told, which comes in at 22 per cent. This eight per cent gap needs to be bridged pronto.

This can be done most positively by raising the GDP and containing or cutting Government expenditure from current levels. The rise in the rupee and growing our foreign exchange reserves also helps, as it reduces our import bills.

Our GDP in real terms is under $ 2 trillion if one combines the official and unofficial economies. But since most statistics are based on the official economy, our GDP is in the region of just $1 trillion. Despite this modest sum, India is still counted as the 10^th largest economy in the world in real terms. Should this GDP go up to $ 5 trillion, as some foreign bankers are suggesting, due to reforms, development, growth etc., then we would be the world’s 5^th largest economy. The foreign bankers suggest this could happen by 2025, but actually it could happen in a lot less time if the Modi Government really pushes growth.

Another report from AT Kearney says FDI has been declining, from $31.6 billion in 2011 to $ 25.5 in 2012 and that India has slipped to its lowest position in their foreign direct investment index. The Modi Government wants to up FDI to $ 50 billion in its first year in office, to both double the inward flow of 2012, and stem the rot. 

The RBI, on its part, needs to get in step with economic ambition of this order, because the Modi Government is unlikely to resemble the UPA and its confused policies in any shape or  manner.

(874 words)

June 3^rd 2014

Gautam Mukherjee