Arun Kumar JNU

2010-05-11T12:18:00.001+05:30

India's Growth Target: Calculations May Go Wrong

2009-02-03T19:09:00.000+05:30

India’s growth target: Calculations may go wrong
by Arun Kumar
The Tribune February 3, 2009

The US Congress passed President Barack Obama’s new $825 billion (82 per cent of India’s GDP) bailout package and in India the RBI announced its policy that changed little even though a lot was expected. It stated that India’s growth would marginally come down from the earlier anticipated 7.5 per cent to 7 per cent. Mr Pranab Mukherjee, while acting on behalf of the recuperating Prime Minister, backed this by saying that the economy will clock a 7 per cent rate of growth.
In contrast to this, there is little wrong with the Indian economic stance. President Obama in his inaugural speech talked of being “in the midst of a crisis”, not only because of the war but because “Our economy is badly weakened…” If India maintains a 7 per cent growth rate it will possibly be the fastest growing economy in the world in 2008-09. Now that the US economy is shrinking even at a faster rate (3.8 per cent last quarter and 5 per cent this quarter), President Obama again said that the crisis was deep. He has suggested that action has to be immediate and quick.
India’s policy makers are repeatedly asserting that the economy will only slow down slightly, implying that no major steps are required. So, even though two stimulus packages have been announced earlier, a huge supplementary budget was presented in October and the RBI has tried to increase liquidity rapidly (without much success); overall, the government is not intervening aggressively enough to boost the economy. This is in sharp contrast to the aggressive interventions not only by the US but also all the other major regions and economies of the world – Europe, Japan, Britain, China and South-East Asia.
It is being argued that India is not dependent on exports and so the effect of the global slowdown would be limited. It is said that we are dependent on internal consumption-generated demand and that is not affected by the global crisis. Further, it is being suggested that our banks are well capitalised and did not participate in the creation of the toxic assets that have plagued the major banks in the world that had resorted to high leveraging. As such, they are not expected to be adversely affected by the ongoing global financial crisis. It is also argued that while the urban areas are linked to global markets and will, therefore, get affected, the rural areas, constituting a huge market, are insulated from what is happening at the world level and so the demand will be maintained.
These arguments are a throwback to the decoupling theory, which has been discredited long back but is making its appearance in a different garb. If these explanations hold, then the government is justified in not taking drastic steps as other economies are doing. However, if these assumptions are incorrect and the government is only posturing because of the coming elections, then we are in deep trouble because if correctives are not applied in time to salvage a deteriorating situation the new government would confront a deep crisis.
It is true that agriculture employs about 50 per cent of the work-force and the rural population is 72 per cent of the total population. However, now agriculture only generates 17 per cent of the total output of the economy. Even if it grows at twice its recent rate of growth of 2.5 per cent, it can only add 0.4 per cent to the growth rate of the economy. If industry slows down from about 10 per cent to about 3 per cent then that would lower the rate of growth by 1.4 per cent.
Finally, if the services sector slows down from around 10 per cent to about 4 per cent, as appears to be likely with trade, real estate, business services, transportation and other services slowing down while very few are maintaining growth like telecommunications, banking and health services, then the rate of growth of the economy may be in the range of 3-5 per cent. In fact, the IMF has cautiously lowered its growth forecast to 5 per cent in contrast to the Indian government sticking to the 7 per cent figure. In brief, the rural market is not very large and can hardly compensate for the decline in the urban markets.
India’s share of exports in its GDP was about 20 per cent in 2007 according to the WTO figures. The comparable figure for China is a whopping 40.8 per cent and for Germany 46.5 per cent. No wonder, as soon as the US recession started, these economies landed in trouble. Germany is in recession and the Chinese economy has drastically slowed down. So, it is correct to say that India will not be affected as much as Germany and China did. However, for the EU as a whole, the comparable ratio is 16.3 per cent and for Japan 19.2 per cent, both less than India’s and both have been in recession for two quarters. Does that give us any hope of escaping a rapid slowdown?
The Japanese banks were not exposed to the toxic assets like those in the US and Europe and yet they face a crisis. As the profitability of major corporations dips, defaults will start and then the bad loan portfolios of the presently healthy banks will take a hit. For instance, Toyota for the first time in its seven decades of existence has made a loss. Many other big corporations are reporting that in the latest quarter, their profits have either dipped sharply or have turned into losses. This is also true for the Indian corporates with Tata Steel, Reliance, Maruti, etc, seeing steep declines. Add to that the sharp decline in prices and activity in the real estate markets and one realises that defaults will rise in India too.
Unemployment is rising rapidly globally and the ILO is projecting a loss of 50 million jobs in 2009. These are mostly middle and upper middle class factory workers and white collar workers who used credit cards and bought against loans on which they are paying EMIs. There is a crisis brewing there. Banks have already turned cautious in India and are not lending as freely as they did earlier, and the Cabinet Secretariat has asked them to remain cautious. This is protecting them from bad loans, but when there is a steep down-turn, will there be anything safe as witnessed in Japan?
Consumption of the well-off sections has taken a sharp downturn. Reliance Retail, Subhiksha, Spencers, etc, are closing down many of their outlets. Sales of automobiles, air travel, etc, have been affected. So, internal consumption cannot be as robust as is being claimed and especially in the face of rising unemployment.
However, help is on the way from a rising fiscal deficit (by up to 5 per cent) due to a reported drastic fall in tax collections and increased expenditures, but this is likely to be offset by the rising trade deficit and the falling investments due to the slowdown and growing uncertainty.
All this raises doubts about India achieving 7 per cent rate of growth this year. In the event, as the economy performs worse than anticipated, the government’s and industry’s calculations are likely to go wrong. The contrast in action planned by other major economies is sharp. We are postponing necessary correctives like employment generation, accelerated rural development and preventing industries from closing down. Are we inviting a worst disaster by being ostrich like?
arunkumar1000@hotmail.com

Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition

2009-01-26T19:05:00.000+05:30

Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition.

Arun Kumar

Mainstream, Republic Day Special, January 23-29, 2009, Vol. XLVII No 6. Pp. 47-51.

I. FIRST IMPRESSIONS
There is little that prepares one for the surprise when one visits Shanghai for the first time. China for all its rapid growth in the last 25 years is still one of the poor countries of the world and a part of the developing world. Yet, the Centre of Shanghai is like the downtown of a modern European or US city. Excellent infrastructure, sky scrapers, no power outages, good roads with proper signages, bicycle tracks and in places even moped tracks. The city boasts of the largest number of hotels and malls of any city in the world. Some years back, Mumbai wanted to be like Shanghai and on seeing it one realized why but it also became clear that the goal is a distant one.
Police is not much in evidence suggesting that the crime rate must be low and people largely law abiding. Unlike Delhi, cars do not have dents and traffic is orderly, driving in lanes and even if one is stuck in traffic jams of which there are plenty, motorists do not jump lanes and create a chaos slowing everyone else down (unlike here). Taxis were plentiful and charged by the meter and apparently there are hardly any complaints of over charging or of taking foreigners for a ride via circuitous routes to make them pay more.
First impressions on landing at the Shanghai airport (Pudong) gave a hint of what was ahead. The airport is massive, very neat and with immigration taking only a few minutes. As more and more disembarking passengers came in, the number of counters open increased from 3 to 15. The trip from the airport to the city was in a comfortable bus on an enviable highway where traffic was fast and smooth. Buses were available with great regularity to pick up passengers to different parts of the town. People were helpful, guiding us (strangers) from the disembarkation point to the hotel.

II. STRONG IMPLEMENTATION
The next day we were efficiently picked up at the appointed time to reach the venue of the conference, the reason for our visit to Shanghai. There was much clicking of cameras as three Indians came to the entrance of the Conference Venue – perhaps to establish that it was an international conference. The Conference organized under the auspices of The Third World Forum on China Studies was titled, `Common Challenges, Common Efforts: Working Together for a Better World’. Organization was excellent throughout the two days with simultaneous translation working well, etc. The picture one got was of a highly organized society where things work. This is the underlying basis of the economic miracle. Decisions once taken (right or wrong) get implemented. There is hierarchy everywhere and orders seem to be carried out systematically so that the institutions achieve their goals.
This can also be disconcerting to someone used to living in a democracy. Is everyone’s voice heard or only those at the top decide what is good for society and then everyone has to follow? As long as the cat catches the mice it does not matter whether it is black or white. This is the basis of the idea of `growth at any cost’. Who is bearing the cost?
At the inaugural session of the conference, it was repeatedly mentioned that there is need for harmony in society - perhaps because there is a growing perception of a lack of it. Are there protest taking place somewhere against this kind of growth? I was asked about Singur. Curiosity suggested that the protests in Singur and the predicament of the Tatas may have some relevance to China also. Massive displacement has occurred in China. Data suggest that there has been a decline in acreage under crops.

III. OLD IS OUT
On a trip to see the cleaned up Suzhou Creek in Shanghai, one was impressed by the changes brought about. What was worse than a stinking nallah (much like the river Yamuna in the lean season) has become clean with fish reappearing and stink gone. All around the beautiful park, created to showcase the clean up to the tourists, are high rise apartments. More are coming up as the old houses are demolished. Obviously, there has been resistance since one can still see surviving pockets of old single and double storied houses. These are hidden behind surrounding high walls. On peeping inside one can see that some houses have been demolished while others are still standing. Conditions inside appeared to be obviously bad and in stark contrast to the modern and bustling city just outside the walls.
One could see this pattern in many other parts of the old city like, around the Yeu (meaning High) Garden. Upon taking a walk through this part, one could see despondency on the faces of those staying in these areas in miserable conditions. They are only being tolerated till the tide turns. It is like they are engulfed by the open jaws of the dragon of modernity and it is a matter of time before the jaws close and they get swallowed up by modernity of which they obviously want no part. Life in the clouds outside their hovels must seem to be like a bad dream which does not vanish when the eyes open. The future is staring them in the face.
In the middle of the Yeu Garden is the old tea house located in the middle of a pretty pond where, as one is proudly told by everyone, the Queen of England and Clinton had come to have tea. Around it are beautiful old buildings seemingly well preserved and teeming with visitors. One felt cheated that these are actually new buildings which have been constructed for tourists to get a feel of what it may have been in days gone by. ASI in India would not have allowed new construction within 100 meters of the historic structure but the Chinese perhaps have no such restrictions to worry about.
What of history? The Europeans try to preserve every old building and their history. We are told that the developers will give those displaced from the older buildings a flat in the new apartment block to be built on that land. They would also get cash. Why are they resisting? One young girl said they are bargaining for more. When one asked if it could be the case that they may value the land of their forefathers and their community more than the money they will get, she sheepishly admitted that it was likely. But she said that the young people want none of that and would happily move. She also added that the young wish to have little to do with the old ideas or things and want to modernize. History matters little to them or perhaps begins with their generation.

IV. VISIT TO A CHINESE VILLAGE
On a drive outside Shanghai, one saw massive projects and highways coming up every few miles. Communities are being swallowed up rapidly. We stopped at a village with ponds full of lotus, a rivulet flowing by, every inch of the land planted with something – maize, cabbage, egg plant, gourds, lemon, etc. Even the few feet between the cemented road and the ditch had cotton growing on it. In the village, some very fancy houses with big cars were surrounded by blocks of houses in rows (perhaps a legacy of the Maoist era) and some very broken down houses. Those living in obviously miserable conditions were few but not lacking in dignity or patriotism. They did not wish to be photographed because they said it would be a loss of face for the community and the country.
Some big construction was coming up within visible range and the construction of a massive highway seemed headed towards the village and it only seemed a matter of time before the village would disappear. These are the limited observations of a limited trip to a village – perhaps not a typical Chinese village since it was in the neighbourhood of Shanghai.
While trying to beat the West at its own game of material development, the Chinese have paid a big price. Their youth wishes to have little to do with its own past. They are highly westernized in approach and envious of us for our ability to converse in fluent English. I often heard it being said that India has excellent higher education by which was meant that many of us knew English. They kept saying that you have services and we have manufacturing. They were incredulous to learn that we have only a handful of good institutions of higher learning and spend about 4% of GDP on Education. They were surprised that it is not government policy but due to the pattern of demand of the elite that we have such a high share of services in our economy.
Seeing the massive investment all around, it occurred to me that could it not have been used to revive and preserve the old? It may have been cheaper also, especially in environmental terms, if the economic model was different from the one being borrowed from the West but then China is in a hurry to catch the mice. So, the real problem is not the colour of the cat but one of what is being caught – mice or something else along with it?

V. GROWING DISPARITIES.
We enjoyed the Chinese hospitality with meals running into twenty to forty dishes. One learnt after the first meal that one can barely taste what was served if one wished to try everything otherwise half way through one had to give up. The green tea, chopsticks and the food seemed genuinely Chinese and the young enjoy it but in their day to day existence some students said there is a substantial switch to quick food, sandwiches and coffee.
Only big cars are in evidence in Shanghai. There is little between them and the two wheelers and the bicycles. Apparently they are not encouraged. Yet, the driver of the car that took us to the rural areas had his dinner at the same table as the group hosting us. The Secretary to the boss was also with us. Dignity of labour is still intact.
Traffic on the roads was massive but none of the vehicles emitted black smoke and so the pollution levels were tolerable even though when approaching Shanghai from the air at night one got the sense that there was a brown cloud hanging over the city but this could also be due to the light pollution. The streets were very well lighted and high beams blinding the traffic from the other direction were not in evidence.
The city is well provided with a East-West and a North-South corridor along with Ring roads. These are roads built over existing roads. There is an efficient metro system and a bus service. But there are traffic jams through most of the day. Perhaps there is a need to build another layer of highways. Where would this stop?
At night one saw some people rummaging through the garbage to collect plastic bottles, etc. One was also told that there were those who slept under the bridges and flyovers and there were many of them. One did not see any beggar (though there are reports of children begging) but there was an old man playing a one stringed instrument and people dropped coins in his cap kept in front of him. However, the number of poor seemed to be far less than one sees in Indian metros. Also, the situation maybe different in the less prosperous hinterland and rural areas. The malls were full of stores from the high fashion world of US and Europe and they seemed to be doing enough business for there to be so many of them. The young aspired to buy this stuff. Disparities are there but apparently less than what is visible in India.

VI. THE MISSING MACROECONOMICS
India is of marginal interest. It is seen as weak and not able to overcome its problems. But its software is seen as something to envy. Indian youth is now going in a big way to study in China because it is cheaper than the private sector professional colleges. The plane we went in had a significant number of young students going there for studies. They were carting spices and food items to survive but China has attractions for them.
The India related papers at the conference saw little interest but privatization in China and Russia was far more interesting. Macroeconomics held less interest than the nitty gritty of how to go ahead with the markets. There was little concern at the slowdown in the world economy given that the Chinese economy was still growing at 10% and it was expected to continue to grow at double digit rates. No one referred to the collapse of Freddie Mac and Fannie Mae and the decline of the value of their shares by 90%. The Chinese investments in these have been substantial and they would have suffered big losses. The high savings and investment rates and large reserves held by China and the resulting high liquidity did not arouse any serious analysis of the emerging situation. Either there was complacency or there are few macro analysts.
In the hotel, at breakfast, one met a couple of executives from Hong Kong who said that non-resident Chinese are active investors. Buildings of all sizes are coming up. The hundred storey building the Chinese completed has been eclipsed by others and especially now by the Dubai Burj but there would be little surprise if one hears of a taller building planned for the coming years. For the Chinese the Earth is Square and the heaven round, so one saw many buildings which have a round something at the top. We were told that the foreign investor ties up with some political heavy weight who delivers on the land and the approval of the schemes. Capital of any description is welcome; displacement and labour are not a problem. The workforce is disciplined and wages not too high but the managers and professionals seem to be well looked after. They are the consumers in the economy.

VII. CHINESE WORLD VIEW AND CONCERNS
The situation in agriculture and in the Western and Central parts of the country are an obvious cause of concern since they have lagged behind. One senior analyst suggested that the government is a disinterested party in development so it looks after the interest of the country as a whole. Others contested this view by pointing to the growing regional and rural urban divide – mirroring the current Indian discussion. Many of the academics are trained in the West and bring with them the western framework of analysis. Neo-classical framework was much in evidence with analysts swearing by the power of the market and largely interested in suggesting how it can be furthered.
In the inaugural session of the conference, the theme of harmony was firmly placed on the agenda but apart from us from India who wove this theme into our presentations and raised this as a serious concern in India and also in China others in our sessions hardly referred to it explicitly. In the round tables held just prior to the concluding session, one did not hear it being mentioned.
In one of these round table discussions, China was upbraided by a Japanese and some western participants for joining the group of 21 to stall the Doha round. It was suggested that China was expected to be more constructive and not to join India. It was suggested that China’s trade could slow down as could its flow of foreign investments. At another round table one heard that China has to adopt the Western tools of analysis for understanding society since only one kind of analysis is possible in today’s world.
In the opening session of the Conference, Mr. Li Wuwei, Vice Chairman, national Committee of CPPCC and Research Professor, SASS, suggested that China has made great strides but this has aroused concerns in the rest of the world and that some call it the “China Threat”. He projected the current trends to 2025 and said the GDP per capita will reach $8,000. He said, it is essential that there be peaceful development in the world and that there is an interconnection between China’s future and destiny and those of the world. He said. `China will continue to contribute to the regional and world common development’. There were elements of China having a hegemonic position in the world and that requires peace.
Prof. Wang Ronghua, President, SASS and Vice Chair of the Shanghai Committee of the Chinese People’s Political Consultative Committee (CPPCC), in a paper, Harmony and Peace: The Global Implications of Chinese Development. SASS Working Papers, suggests, `Western powers typically rose through overseas expansion, often connected with wars.’ While China is `influencing the world constructively by reforming itself.’ He states, ` … lifting approximately 300 million people out of poverty. … in every sense a substantial contribution to human cause of peace and development.’
He suggests, `Two features shaping Chinese development are easily identified: its massive territory and wide gaps between different regions.’ It is a cause of concern that `levels of development in China are still very imbalanced amongst different regions.’ Regarding the world economy he suggests, China `is expanding the volume of global market on the one hand, and on the other hand, helping to curb rising costs and any consequent worldwide inflation’ and this is because it `has great comparative advantages, especially in labour’ but unfortunately, this is not seen as the cause of great and growing disparities.
If one asks is China still socialist? It is reiterated that China has a unique path of development. But it is not explained whether what exists is distinguishable from state Capitalism and primitive accumulation of Capital.
Professor Li Junru, Vice President, Party School of the Central Committee of the CPC and Vice Chairman of China’s Reform and Opening-up Forum, speaking in the inaugural session talked of `the Adaptation of Marxism to Chinese Conditions’. He said, `adapting Marxism to Chinese conditions is just to make every communist party member act with Chinese characteristics.’ He said that Deng Xiaoping suggested, `taking our own road and building socialism with Chinese characteristics’.
According to him, application of value orientation is important which implies `to save the whole nation from great misery’ and `to liberate the whole Nation’. According to him, Deng Xiaoping used this to argue that `the Chinese development can not be away from the world’ and this led to the opening up. This was the objective of reform. Jiang Jemin used this to suggest `our Party should follow closely the progressive trend of the world’. He used this to join WTO and become a part of economic globalization. Hu Jintao has used this to put forward a global strategy of `following a win-win strategy of opening up’.
Zheng Bijian, Former Executive President, Party School of the Central Committee of the CPC, former Chairman of China’s Reform and Opening up Forum said economic globalization started in the middle of 18th century and identified three great turns in it. He suggested that the US failure in Vietnam and Soviet’s failure in Afghanistan made their globalization strategy meet with serious setbacks. He said, in the 21st century we are facing a new `hundred schools of thought’ and this is the third time it has happened in Chinese history. He doubted that the idea of `civilizational conflict’ and the shifts in characterization from `China Collapse to China Threat to China uncertainty’ have much validity in them.
He said, `socialism with Chinese characteristics is a socialism that advocates peace’. He added, `it is impossible to have no twists and turns, ups and downs and even mistakes; it is impossible to be out of balance, out of control, corruption, underside, and even chaos;’ He identified the massive work force in agriculture as a problem that needs to be solved and suggested that there has to be a ‘new industrialization route’, a `modernization route with Chinese characteristics’ but what this means is not spelt out. He suggested that `we can’t learn from the Western Powers the colonist plundering of the world resources’ or `learn from the military nations like Germany and Japan’ or copy the `hegemonism of the former Soviet Union’. He suggested that there was a need for a `harmonious world’.
Mei Zharong, Former president of the Chinese People’s Institute of Foreign Affairs Former Chinese Ambassador to Germany, suggested that China’s rise has led to `malicious attacks of the Western Powers’. He said that they speak `ill of China’s human rights in spite of the China’s actual conditions’. He said that the West is worried about China aiding Africa and falsely accuses it of locking up or plundering its natural resources. He also raised the issue of western support to Dalai Lama under the garb of supporting cultural autonomy. He suggested that China `must keep modest and prudent’, further, `must avoid all means self praise and publicize everywhere and play tricks of “image engineering” and “achievements in official career”.’
All in all, China is projecting itself as an economically successful nation and telling the world that it is ready to take its place in the comity of nations as a leader. It is not particularly worried about its socialist past or claim to be governed by a communist party. It advocates peace to enable its growth to continue so that it becomes the world leader by 2025.

VIII. CONCLUSION
It is clear that China has not evolved a successful indigenous alternative so when Maoist philosophy gave way what was left was the path of western modernity which was dominant in the world. So, for the upwardly mobile, the notion of success has become `Western’. Young people aspire to go West to study. Those adopting the western ways are seen as successful. The youth seems to have given up China’s history in a big way as redundant.
Did communism and its failure after the mid Sixties deliver China to the West? That has happened in much of the world and in the former colonies that fought on the plank of nationalism and indigenous development. The cultural revolution and the running down of all forms of past practices from before the revolution suggested to the population that all the ancient influences were backward and had to be given up in favour of western modernity.
It was a fascinating trip to a great country which has taken rapid strides in material terms but there were uncomfortable questions related to the need for any great country to have its own path which was not in evidence in China? One was groping to understand how a great civilization with such a long history has suddenly given it up in substantial measure?

arunkumar1000@hotmail.com.

Analyzing The Satyam Affair: Pointers to Business Fraud in India

2009-01-24T12:32:00.005+05:30

Analyzing The Satyam Affair: Pointers to Business Fraud in India
Arun Kumar
CESP,SSS, JNU, N Delhi 110067.
The Tribune January 24, 2009

Business fraud is nothing new in India. Businessmen are known to go to great lengths to make money through legitimate and illegitimate ways. Clever accountants and lawyers are employed to devise ways to generate higher profits for the businessmen.

The Satyam affair stunned everyone when it’s supposedly `honest’ chairperson admitted to committing fraud over the last several years. Apparently, Satyam has been defrauded of Rs. 7,000 crores but the final tally could be larger. The loss to the share holders and employees would be by a multiple of this sum. In comparison, the Harshad Mehta episode in 1991-92 was estimated by the Jankiraman Committee to be of the order of Rs. 3,900/- crores even though others claimed it to be eight times bigger. Ketan Parekh’s manipulations led to massive losses for the entire community of stock investors. Collapse of Global Trust Bank, Telgi scam and other such cases have erupted from time to time.

By one count, by end of the 1990s, 2,500 companies that had raised money in the Indian stock markets had disappeared with the share holder’s money. The government did not act against these fraudsters and this emboldened the owners of businesses to commit more frauds.

Mostly, managements declare lower profits to escape paying taxes and that is how black incomes are generated. What is curious about the Satyam affair is that according to its Chairperson, Mr Raju, it was supposedly doing the opposite, showing higher profits. That means that Satyam was paying more taxes than it needed to have - a double whammy for the shareholders. Not only was their company less profitable than they thought it to be but it lost money because of excess tax payments.

However, analysts have argued that Satyam could not have been showing higher than actual profits. If Mr. Raju is to be believed, Satyam was operating with margins of 3 to 4%, and this cannot be correct since the margins of comparable software companies are in the range of 25%. So, many believe that Mr. Raju is lying under the garb of telling the truth. The puzzle is that Satyam should have had higher profit margins but its owner, Mr. Raju is claiming that it had lower margins and willingly implicating himself in fraud. Is he trying to cover a bigger fraud?

Why would an owner show higher profits? First, to manipulate the share price since it rises as declared and expected profits rise. This helps in raising the credibility of the company and its management and thereby enables it to raise more funds for further expansion of the company. Secondly, when there are concessions in taxation on profits, it may pay to divert profits from a company not entitled to tax concessions to a company that is entitled to tax concessions and thereby save on tax payments. There was concession under 80 HHC on profits earned in exports and later it was available under section 10A for exports from special zones. Since these provisions were/are for exports, exports have to be over invoiced. Hence more foreign exchange has to be brought into the country than was earned and this way black wealth held outside or profits of other companies siphoned out of the country through havala are brought back – i.e., reverse havala.

Finally, Mr. Raju could be siphoning out funds from Satyam to sister concerns that were dealing in real estate. One can conjecture that given the recent collapse of real estate prices and slowdown of investments in this sector, the sister concerns were in need of funds and possibly in trouble.

Major infrastructure deals had been signed in the last few years involving payment of large sums of money including in black and as cuts to politicians and bureaucrats. This could have been financed through drawing out of funds from the accounts of Satyam. These would have been recouped in the normal process when land was sold for commercial purposes and black funds obtained which would have been put back into the bank accounts and fixed deposits of Satyam. The crisis in real estate and fall in prices and drying up of investments in real estate would have meant that the funds were not coming back.

The purchase of the sister concerns at high and inflated prices would have meant that the fictitious accounts worth Rs. 7,000 crores would have been drawn down and money transferred to the owners of the sister concerns, that is, to themselves and then there would have been no one to ask where is the money. So, by book transfers, the earlier siphoning out of funds would have been covered up and the false entries of the bank balances and fixed deposits reversed/set right.

Mr. Raju thought that his prestige as the pride of Andhra and his political clout would enable him to commit the brazen act. These factors had earlier enabled him to obtain the silence of Chartered Accountants and the independent directors on the board of Satyam. The Satyam story would perhaps have not broken out as yet but for the crisis resulting from the failure of the attempt to buy the two sister companies.

The forced reversal of the decision to buy the sister companies and the investment banker’s approaching SEBI with the story of the non-existent balance in the banks was the trigger to the realization that the game was up. There was little time to bring back other black funds and perhaps due to the global crisis they had got stuck. Since the funds did not exist in the Satyam bank accounts he had to cover up by saying that the actual profitability of Satyam was lower and that he had been inflating profits for years - an attempt to portray honesty while committing a fraud. This line may also help in the cases in the US courts, to reduce the severity of the fraud and penalties.

The involvement of managers of banks where the non-existent funds were supposedly held is likely. Similarly, the auditors may have looked the other way rather than questioning why so much cash was being held in bank accounts. The independent directors should have asked why Rs. 5,000 crores was held in savings accounts when in Fixed Deposits, Rs 400 crores could have been earned.

The board consisting of management gurus, former bureaucrats and businessmen could not have been so naïve as to not realize that something was remiss. How could they approve the purchase of two family companies at such exorbitant prices when it was apparent even to the layman that something was remiss? Why did they keep quite as cash in banks piled up? Perhaps, through cozy relationships, they benefited in political and financial terms.

It is now coming out that even employment was being fudged and profits so generated were siphoned out. Shady land deals and support from the various Chief Ministers are being talked about. How many skeletons will tumble out is not clear?

The Satyam affair points to the sharp practices adopted by crooked Indian businesses - siphoning out of profits, fudging of muster rolls, the cozy relations with politicians and bureaucrats and finally, manipulating bankers, `independent’ auditors and `independent’ directors. All this is well known in the context of the rampant black income generation. Mr. Raju’s admission has brought into question the notion of a `respectable’ or `honest’ businessman. As the global crisis deepens and more frauds surface, more reputations maybe dented. In India we are used to wrongs of the high ups emerging with great regularity and then to having amnesia about them – perhaps a cynical view but not far from reality.
arunkumar1000@hotmail.com

The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon

2009-01-10T18:25:00.002+05:30

The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon
Arun Kumar
CESP, SSS, JNU.
The Tribune, January 1, 2009.
The year 2008 started on a high with the economy doing well, stock markets at a historic high, real estate markets booming, industrial growth running at upwards of 10 per cent and inflation at low rates. The finance minister boasted that the macro economic fundamentals are good and the Eleventh plan target of 9 per cent average growth rate viable. There was little inkling that policy making circles understood that a deep economic downturn had set in India and the entire world.
Contrasting this rosy picture, the year is closing with wide spread reports of declining employment, stock markets down by 50% to the levels of 2006, declining real estate markets, industrial growth and exports showing negative growth and many components of the services sector declining rather than growing. This has happened despite the unprecedented interventions by the government and the Reserve Bank – the infusion of massive liquidity, huge supplementary budget and the announcement of the first package of fiscal stimulus soon to be followed by a second one. FRBM has been given a quiet burial.
The year also saw much turmoil due to a rapid acceleration of inflation from its lows in January to the highs in the middle and now to a rapid decline in the closing weeks of the year. It seemed that the government had lost control because at one point the government admitted that it could do little to keep inflation in check by pleading that it was stable and not rising further.
Internationally, the prices of crude oil which had reached a peak of around $150 per barrel have sharply fallen to around $40 in spite of the threatened cut in production by the oil producers. In fact, many, like, Goldman Sachs had predicted that the price of crude would be around $200 by the end of 2008. Similarly, given the blistering pace of the rise in the BSE experts predicted that it would touch 30,000 - three times the level ruling currently. All this calls into question the expertise of the so called experts and policy makers.
The year began with policy makers and experts suggesting a decoupling between the Asian and the US and European economies. They suggested that the rapidly growing economies of Asia will provide the boost to the advanced economies so that there would be a soft landing for the world. This was based more on hope and hype rather than on analysis (As argued in these columns on February 6, 2008). These economies were already at their peak growth rates and could not double them which was required to compensate for a decline in the rates of growth in the OECD economies. Further, since China is heavily dependent on exports to these economies and India is much more open than earlier, if anything, their rates of growth were bound to fall. These two economies could not move in a direction opposite to that of the bigger economies, as events have borne out. Clearly, all along the policy makers and experts have been hoodwinking by denying reality. They also fooled themselves and did not take timely steps so that the situation became worse than it should have and now everyone is paying for it.
The rich have lost a lot of paper wealth on their financial assets where much of their savings were invested. These people also had substantial amount of their black wealth stashed away abroad because this was also invested in financial instruments. These people were also operating real, nuts and bolts companies or offices and due to the slow down, these are also in trouble. The contagion has spread from the financial markets to the real economy.
All this has impacted the middle classes who have linkages in the organized sectors. Many of them are in the process of losing jobs and their children are not getting the good jobs they expected. Further, a large part of their savings in financial assets – stocks, real estate, mutual funds, etc. - have been wiped out. In recent times they were lured by stories of high returns and greed won over caution. Many NRIs will possibly return as they lose jobs abroad and add to the employment pressures. Remittances that supported many families are likely to dry up leaving families in trouble. Public sector employees with safe employment will have a good time as prices fall.
Some argue that the poor will not be hit by the current crisis because they are marginal to the market and especially the financial markets. This is fallacious because the marginal are coercively linked to the markets in a one way relationship. While they derived little benefit from the high but marginalizing growth they will suffer from the decline. Even if they lose a few rupees a day of income, it will be calamitous for them since they are at the edge of survival.
As unemployment builds up the world over, wages will fall and disguised unemployment will rise. Price fall will help but not enough. Employers in the unorganized sectors and the rich farmers who will be squeezed by the crisis will put the squeeze downwards and affect adversely the incomes of the poor. Government programmes like rural employment schemes can help the poor but corruption moderates its effect.
Agriculture in India has been increasingly export oriented and there has been a shift towards commercial crops and high cost agriculture. The markets for these commodities have declined sharply and the slide can continue unless prices are sharply lowered but then the surplus farmers will lose out. The traders will put the squeeze downwards and the farmers will do the same to the landless workers.
In India, big and medium sized firms buy from the smaller units in the unorganized sectors. As these units face decline in demand, they will be forced to shut partially or wholly , reduce shifts and cut prices which is possible only if they squeeze either the wages or the smaller ancillary suppliers (possibly both) who in turn will squeeze their workers. Thus, wages of workers are likely to decline all around and their employment curtailed.
Governments all over the world have put together huge packages of interventions to prevent their financial sectors from collapsing but done relatively for the real economy and the poor. This has certainly slowed the decline but it is still continuing. The problem this time is different than in 1929 and much deeper, linked to the basics of the world economic system. Merely trying to reflate the economies without any basic change will not work.
In India, the NEP launched in 1991 depended on the proper functioning of the global financial system but because this is now collapsing, the success of NEP is in doubt. While the marginalized sections were suffering and continue to suffer, now the beneficiaries of the NEP are being grievously hurt. In the changed global scenario, NEP need a rethink.
Many companies are close to bankruptcy if not bankrupt, public does not trust the present financial system so it has ground to a halt and due to extreme uncertainty, everyone wishes to remain liquid rather than invest. The crisis has been building from 2006 without our recognizing it and we are still groping for solutions because these have to be out of box and this will take time. If the social and political situation deteriorates with rising unemployment and destitution, then even big economic interventions will not succeed and governments will become helpless. While 2008 is closing on a difficult note, 2009 appears to be heading for deeper trouble.

Eventful Year 2008: Descending into the Precipice

2009-01-10T18:11:00.000+05:30

Eventful Year 2008: Descending into the Precipice
Arun Kumar
CESP/SSS, JNU, New Delhi 110067.
Published on January 5, 2009 on Taxindiaonline.
http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=8395

Year 2008 began with all round predictions of reduced but positive growth for the world economy. The US economy was expected to continue to grow even if anemically. Mr. Paulson, the US Treasury secretary and Prof. Bernanke, the Fed chief prognosticated that the problems faced by the US economy were tractable and certainly not systemic – something they admitted only on September 19, 2008.
2008 is ending with rapidly rising unemployment and houselessness due to foreclosures and a deepening recession in the USA. The trend is no different in the other major world economies. Some have suggested that this is just the start of a major downturn in the world economy. Fears of deflation in the world economy are real with prices softening and this could head the world towards a depression and a recovery many years away.
The US financial system is no more what it was even six months back. Major entities like, the housing mortgage giants, Freddie Mac and Fannie Mae, the insurance giant, AIG, the largest US bank, Citibank, the giant investment banks, Goldman Sachs, Merrill Lynch, Lehman Brothers and Bear Sterns, have faced collapse. They have had to be bailed out by the government or gone bankrupt. Given the inter linkages the effect on the real economy has been sharp. The rest of the world has been hit hard by these events.

GOVERNMENT INTERVENTIONS: TOO LITTLE, TOO LATE.
USA, Euro zone, UK and Japan are all in recession while China and India are slowing down rapidly, in spite of the massive interventions by all governments which according to one estimate exceeds $10 trillion - about one sixth the size of the global GDP. The slide in the world economy is continuing even though under normal circumstances this would have led to hyper inflation – times are clearly abnormal.
Each time the US government felt that it had licked the problem - tax cut in February, bail out of Bear Sterns in March, take over of Freddie and Fannie, bail out of AIG and then of Citibank - fresh problems erupted soon thereafter. Finally, when the unprecedented bail out package of $700 billion was announced on September 19, it was felt that the collapse would halt. But fresh packages have had to be announced and now it is suggested that the U.S. President elect, Mr. Obama, is planning another package of $800 billion. The gravity of the situation maybe gauged from the announcement by the Fed that it will print as many notes as would be required to stem the collapse.
Each time, government intervention has been `too little too late’ so that the crisis has continued to deepen. The stock markets have responded temporarily till the next bad news. Most policy makers and analysts have been in a state of denial so that rather than anticipating events they have been surprised by them. This could partly be because they wished to avoid panic but the effect has only been a worsening of the situation due to lack of timely actions.
One of the key reasons for the spread of the contagion is the interlocked nature of the balance sheets of the various economic entities. Today, almost any seemingly healthy company can soon head towards trouble because it is not able to recover money from some other entity to which it has extended credit and which is failing. Hence trust has evaporated and credit has frozen almost all over the world and made central bank interventions ineffective. The delay in a decisive response from the US since it has a lame duck President is likely to prove expensive since toxicity in the financial system would have spread further by January 20, 2009 so that even more drastic intervention would be required then.

FINANCIAL FRAUD
The recent discovery of the audacious Ponzi scheme run by Mr. Madoff of the USA, resulting in losses of possibly $50 billion to various entities is going to aggravate failures and fresh problems will appear. Losses have been incurred by charities, universities, individuals, asset management funds, etc. Not only will pensioners and university students be affected, the viability of some of the companies involved will be dented and some of the smaller entities may head towards bankruptcy.
The Madoff fiasco shows that those who were supposed to be alert on behalf of the public - auditors, SEC, etc. - were possibly taken in by the swindle (a charitable view) or were a party to it. It highlights the all pervading desire to make a quick buck with little regard for risks. Since others were making money it was a good enough excuse to take unacceptable risks and make money.
While Mr. Madoff committed fraud and more such frauds maybe discovered in the coming months since there were many clever people who were hoodwinking others and making a killing for themselves, the crisis is deeper than fraud. The problem lies in the way the financial system was functioning.

DO WE REALLY KNOW WHAT TO DO?
Some have argued that because the world faced the depression of 1929, we know what to do. Namely, go in for massive fiscal intervention through the creation of fiscal deficits to boost demand. However, even this may not work since the nature of the crisis is different from the earlier one. There was lack of demand and the lesson learnt was to intervene counter cyclically to reinflate the economy.
This time while the deficiency of demand initiated the problem in the financial system that was only a trigger for the collapse of the current financial system. The collapse itself is not due to the deficiency of demand but linked to the structure of the unregulated financial system which has a built in instability which is now playing itself out. The financial bubble inflates gradually but deflates suddenly. This leads to loss of trust and collapse of confidence which then pulls the rug from under the feet of the financial system. The financial markets then freeze so that even Central Bank’s and government’s interventions fail to revive the economy.
The world economy can still produce the output it produced in June 2008 – the factories, offices, fields, etc., are still there – but the system of production which is based on finance to lubricate the flows of goods and services has been disrupted and hence the real economy has been dented. The real and the financial sectors are interlinked and the latter is taking the former along with it. Since the government announced interventions are too little too late and unable to prevent the collapse of the financial sector, the real economy is also not responding to the steps announced till now.
The problem stems from the fact that while each financial transaction is separately reversible, the totality of transactions is irreversible due to the complexity involved. Further in a situation of a freeze in credit markets, governments do not have the resources to cover the losses of all the entities or even most of the losses of some of the major entities.

IN FOR A LONG HAUL?
With spare capacity emerging everywhere and as slow down accelerates, many factories are shutting down or working fewer hours. In this situation, investment plans are bound to be frozen, as reports suggest and demand falls further. This suggests that any chance of a turn around any time soon is bleak. Unless demand begins to turn around and unutilized capacity worked out of the system, investment levels will not recover.
Government interventions have largely helped the financial sector because policy makers are mostly financial experts. But this will neither help raise basic demand in the real economy nor shore up trust and confidence in the shattered financial system because what the government can provide is a fraction of the total losses being incurred. Consequently, the recession can only deepen.
As recession deepens, commodity prices will weaken. Petro goods prices are a case in point. In spite of the slow down having just started, crude oil prices have fallen by a massive 70% from their peak. Many other commodity prices would also fall substantially since their prices had also climbed sharply till 2008 middle. There is an underlying worry of a deflation and if that happens a depression would be inevitable.

INDIA AND CHINA AND ABSENCE OF DECOUPLING.
The Chinese economy has slowed down rapidly due to its dependence on exports. Indian economy which is less dependent on exports has also slowed down. Confidence of investors has been dented by the sharp decline in the stock markets triggered by the withdrawal of funds by FIIs and reduction in the flows of FDI. With gaping holes in the balance sheets, companies need funds to shore up their accounts so they are willing to sell assets even at a loss. Further, since these markets had gone on a speculative boom and were overly priced, it pays to leave early rather than late setting up a herd mentality.
The exporters of primary produce - the developing world, petroleum exporters, etc. - will be hit hard by this decline in commodity prices. In India, Bellary iron ore mines have seen activity drop from a reported 15,000 trucks per day to just a few hundred trucks per day – a drop of more than 95%. Many plants have announced planned monthly closures or reduced the number of shifts. The over heated real estate markets and construction industry have taken a severe drubbing and along with that the cement and the steel industry. Tourism, hotels, transport, finance, trade, consumer durables, etc., are declining.
If the rate of growth of the major economies of the world falls by one per cent, then China and India can compensate for that only if their rate of growth goes up by at least 10 per cent. Given that they were already growing at possibly their peak rates, this possibility never existed so a decline was inevitable. Further since the two depend on exports to the advanced countries, their growth was bound to slow down and worsen the situation.

INEFFECTIVENESS OF POLICY INTERVENTIONS
The collapse of the British Pound, the decline in the Euro and the rise in the dollar has been the response of the crisis ridden financial sector. In spite of the weakness of the US economy, the dollar seems safer than other currencies. Investors feel that the other economies will sink more than the US since the big loses the least. Further, the confusion in the Euro zone due to competing national interests has reduced the chances of a coordinated response so that Europe could suffer badly. In contrast, the US does not face this problem.
In times of crisis, theory suggests that economic entities facing uncertainty go liquid and that is what we are witnessing all over the world. Hence interest rate cuts do not stimulate the economy. Release of liquidity by Central Banks is simply being held and not circulated – money multiplier and the velocity of circulation have collapsed leading to a freezing of the financial markets.
Central banks and governments are liberally promising money to companies without any risk assessment. They have become the lender of first resort to the financial sector and are no more the lenders of last resort as required by banking theory. Are they equipped to assess the risks involved, etc.? In any case, it takes a while to decipher the balance sheets made by clever accountants and lawyers who have devised myriad ways of hiding holes in the accounts. AIG has absorbed $150 billion in the months since September, 2008 but hardly anyone understands where the money has gone and how much more may go.

NEED FOR GLOBAL COORDINATION
The stimulus package of one country may fail due to inaction by others so that there is need for global coordination. Action by one may benefit another due to the global nature of the economy and the former may be left with deeper problems. This is likely since different views of what needs to be done prevail. Mr Obama’s non participation in the G 20 summit in November is an indication that he did not see eye to eye with Mr. Bush. Germany has been critical of Britain. China has hinted at moving away from the dollar since it has suffered big losses. Iceland froze British assets and the latter declared the former a terrorist state. The US rapidly losing jobs could go in for protecting jobs by making retention of jobs in the USA a condition for bailing out companies. All this is pointing in the direction of protectionism.
While global coordination is essential it is necessary but not sufficient for recovery. The problem is, policy makers do not quite know how to resolve the crisis. Understanding of the past is useful but inadequate given that the core problem is not what it was. Policy makers have to get out of their state of denial and the hope that somehow the crisis will blow away – we are not in the world of inevitable happy endings.

CONCLUSION
The world cannot do without the financial system that is essential for investments and trade to occur efficiently. This basic function of the financial system was eroded by the various imaginative innovations in the financial system and led to collapse. These were supposed to lower risk but now it is clear they ended up enhancing it.
There is need to restructure the global financial system completely. The present system has completely lost credibility with the citizens and investors. Trust is not likely to return any time soon given the kind of losses that have been suffered all around – running into trillions of dollars. Experts are no more going to be acceptable to the public since they have proved to be too clever by halves and caused enormous losses to their clients.
The complex financial system was treated by the vast majority of the investors as a black box and faith laid on it because the experts said so. This opacity did not matter as long as money was being made but now the public would demand transparency.
In fact, as is now clear, most policy makers themselves did not fully understand what was going on. Alan Greenspan has admitted this. Demand for proper regulation of the complex financial system is likely to grow so that the powers of the Central Banks are likely to be enhanced and more policy intervention maybe acceptable. The fragility of the financial system would no more be acceptable. A long term view would have to be taken since it is now clear that short term profits with eventual collapse is worse than a steady return. All in all, we are in for a long haul and in 2009 we are entering a world substantially different from the one we started with in 2008.

Sign of Systemic Crisis: US Companies too big to fail but failing

2008-12-13T18:47:00.000+05:30

Sign of Systemic Crisis: US Companies too big to fail but failing
by Arun Kumar
The Tribune, December 13, 2008.
TILL early 2008 it was believed that certain economic entities are too big to fail, hence safe. Companies like, Fannie Mae and Freddie Mac, AIG, Merrill Lynch and Citibank each with assets running into hundreds of billions or trillions of dollars were supposed to be in this category. Their turnover was larger than the GDP of most countries in the world. Each one of them has failed since August 2008 and has been bailed out by the US government or bought over by other companies. General Motors, another giant, has been pleading for help.
Earlier, even if such companies faced financial problems they could stay afloat for years before going under. Now these companies have collapsed in a matter of months. Citibank with reported assets of $ 2 trillion and operations in 100 countries was considered to be healthy and was to take over Watchovia bank in early October but in the third week of November, it has had to be bailed out by the government. Fannie and Freddie were supposed to be healthy in May 2008 but had collapsed by September.
Governments the world over are pumping in trillions of dollars to shore up their economies. The mega package on offer from the US government amounts to $ 7.8 trillion. $ 1.7 trillion is being offered as loans to companies whose hard to sell securities are being accepted as collateral. Since there is substantial chance of failure in this, it could amount to a dole to these companies. Investment worth $ 3 trillion is being poured into buying stocks, corporate debt and mortgages. $ 3.1 trillion is the amount of guarantees on offer to corporate bonds, money market funds and money in specified deposit accounts.
Britain, China, Germany, Japan, etc. have also offered their own packages, each running into hundreds of billions of dollars. The Indian government has pushed liquidity and additional budgetary provisions of $ 100 billion. Thus, the total amount committed world over has swelled to above $ 10 trillion (eleven times India’s national income). For a world economy of $ 65 trillion, this is a staggering amount of money and most of it is committed since September. Yet, things seem out of control even though the pace of the collapse maybe slower compared to two months back.
Rates of economic growth have plummeted. In August 2007, the US economy was slated to grow by a healthy rate, by mid 2008 marginally and now a recession has been declared since 2007 (anticipated by this author in these columns on Feb 6, 2007). An even sharper decline is expected in the next quarter. European zone, Japan, Taiwan, etc., have been declared to be in recession whereas they were supposed to have positive growth till early 2008. Chinese economy has slowed down considerably since mid 2008 and so has the Indian economy (whatever be the government’s claims of healthy growth).
Demand is plummeting everywhere and companies are laying off people many of whom were anyway losing their houses in the US due to foreclosures. There are reports of people living in their cars in parking lots and also of worried banks requesting some people not to vacate their houses till they find a buyer. Temporary employees are losing jobs and the permanent workers are working fewer hours because of plant closures. Failure of banks and companies is rising in the USA. This could spread to other countries too.
Nationalisation and government intervention have suddenly become acceptable. Minimum government is no more the desirable state of affairs. The kind of liquidity being released into the markets in a short space of time would have resulted in massive increase in demand and possibly hyperinflation if the situation was normal. Yet, in the present scenario, these steps are neither able to stem the decline of the financial institutions nor demand in the economy.
Can the governments go in for even larger packages of intervention? The US Fed has said that it will print whatever notes would be required, to prevent a collapse of the US economy and that seems to be the stance of most of the Central banks in the world.
Investment is falling everywhere since companies are not only facing a collapse in consumer demand but also are not sure of their own financial situation and would like to strengthen that before going in for fresh commitments. This is aggravated by drying up of credit since everyone is suspect in the eyes of others.
Exports have collapsed as demand has fallen and nations are buying less from others. Thus, all the major components of demand — consumption, investment and exports — have declined drastically. Only the government is left. This is the reason that the various economies are headed into deep recession and possibly a depression. So much spare capacity is emerging in each industry that it will take a while for this to be depreciated and for new investment to become worthwhile. It is only then that growth can pick up.
The nature of the crisis being faced today is different from the ones in the last 75 years. Hence analysts are groping for answers and specially those in policy making who led the world into this crisis. Governments can try to keep demand going by spending more on infrastructure (both physical and social). However, that may have limited effect unless it is on a massive scale, something that the present policy makers seem to be uncomfortable with.
The US financial system as it existed till the beginning of 2008 has now failed and a new one is needed to replace it. The moot point is since it was such an integral part of the US economy does it not need revamping instead of just the financial sector. The nationalisation/government takeover of major institutions and the introduction of regulation in the hitherto unregulated parts of the financial structures is itself changing the economy in fundamental ways but even this maybe mere tinkering and more basic change maybe required.
The failing mega institutions located in the US commanded huge amounts of the world’s resources and not just those of the US. This is what capital does; it enables control of institutions and resources in a few hands. So, failures on this scale will lead to a collapse of major economic structures in the world and will affect production world wide (as is already happening).
When those entities that were thought of as “too big to fail” actually fail, it signifies the failure of the system of which they are a part. It is not that the world suddenly cannot produce what it was producing till say July 2008. It is the organisation of that production (with control by finance) that is failing and hence the decline in the world economy. The marginalised who hardly benefited from the boom are hit by the bust. Remedy requires that controls over resources be reworked, monopolies need to be split up and their control over resources and political power and the resulting increase in disparities all need overhaul.
arunkumar1000@hotmail.com

Current Financial Turmoil - Lessons for the Future: Video Link

2008-12-04T17:13:00.000+05:30

Interests of the Unemployed: A Radical Agenda for Obama

2008-11-20T18:41:00.002+05:30

Interests of the unemployed: A radical agenda for Obama
by Arun Kumar
The Tribune, November 20, 2008.
Against all odds, Mr Barack Obama has won the Presidency of the US only to be confronted with extraordinary odds — incomparably greater than those faced by any recently elected US President. Economically, socially and politically, the country and the world are in a state of deep crisis. The US as the leader of the world is both a cause of the problems and a possible source of solutions. Without the US being a part of any solution, it is unlikely that the world, as it is, will be able to resolve its problems. In this sense, it is said the whole world should have a vote in the US presidential elections.
The G-20 heads met under the leadership of a lame-duck US President, Mr Bush, in a largely futile talking exercise. Our own Prime Minister made noises about how he saw the crisis coming while till the other day he was saying that there is no crisis; does credibility matter. Mr Obama did not participate, perhaps due to his irreconcilable differences with Mr Bush who only talked of the free markets. Mr Obama’s presence may have given the wrong signals and made his own task more difficult when he takes over in two months. However, this delay could be very expensive.
Not only is the economic weight of the US so large that it determines world economic events but its financial and political clout sways other countries politically and socially as well. It draws the best in the world to its universities and think tanks and leads all others in research in almost all fields. Thus, it is able to set the agenda for the entire world in intellectual terms and also because it has lobbies pushing for its interest in almost all parts of the world. It dominates the multilateral agencies and that is another important source of its influence. From issues of poverty removal, research in health, agenda for the environment, nature of the financial architecture, fight against terrorism and money laundering, etc, the US moulds world events.
To be able to lead in such an extraordinarily complex world on such a broad front requires statespersonship of a high order among the leaders. This has been missing for decades. The US and, following its lead, most other governments in the world have been governed by narrowly defined short-term self-interest. One may say, what is new? But in a far more complex world, old ways will not do. Narrowness of approach is a recipe for disaster and pay-back time has now come. The world as we have known it can hardly survive.
All the above listed problems have a common source, a belief in a narrowly defined national and individual interest, based on greed and unlimited exploitation. Thus, respect for nature and other people has been at a discount. While this was tolerated earlier, today this has serious implications, especially at the economic plane and now we are confronted with a collapse for which no one has an answer.
The governments all over the world are scrambling with packages to salvage their financial institutions and their economies. Huge sums of money are on offer (capital injection, loans, etc.) — amounting to about $5 trillion. The financial bubble, which is in the process of collapse and is dragging down the real economy, was a result of deregulation of the financial markets and an undiluted pursuit of lucre and the resulting massive disparities in society.
The financial assets created (in hundreds of trillions of dollars) were a multiple of the size of the real world economy (around 60 trillion dollars) so that the latter does not have the resources to resolve the problems created by the former. Governments can neither replicate the markets nor their intervention is adequate to stop the financial bubble from collapsing.
The financial bubble consists of borrowings and lending by various economic entities. As the bubble deflates, while asset values decline, the liabilities remain. Hence institutions develop huge holes in their balance sheets. Since the various financial entities are interlinked through borrowing and lending, as one institution collapses and is unable to pay its lenders, the latter runs into problems and this ricochets to yet others leading to further collapse. A vicious cycle sets in and institutions lose trust in each other and stop lending to others and instead try to accumulate capital to cover their own declining asset base. The money given by the government goes to support their own asset base with little lent to anyone else.
While the build-up of the financial bubble is gradual and systematic, its collapse is sudden and chaotic and that is why it is beyond anyone’s control. Release of liquidity and cuts in interest rates do not spur investments and the economy enters a “liquidity trap”. In this scenario, it appears inevitable that the financial markets would collapse and nothing in the short run can save them.
Unfortunately, businesses are inter-linked, a large number of the firms dealing in real products and services also were involved in the financial markets to invest their funds or to cover their risk (say, in foreign exchange). These firms are also suffering losses. Further, they are confronted with a slow- down in demand and a tightening of the credit markets since borrowing and lending has frozen. Thus, the growth rate of the real output which had already started declining in 2007 is now in negative territory over large parts of the advanced world.
Consequently, unemployment is rising dramatically all over the globalised world. This is going to bring real pain to a vast majority of the people while the collapse of the financial world hits only a small percentage of the rich and the upper middle class populations. The collapse of the latter is inevitable but if the former collapses, it would be catastrophic. The choice before the governments is clear — should funds be thrown into the bottomless pit of the financial sector without any real benefits or should they be used to retrieve the real economy and keep it going?
The US government is an establishment run by various vested interests, and the financial sector interests are deeply entrenched in it — they have been running the Treasury and the Fed for long. Their interest is seen as the main interest. That is why the poor are not getting help with their houses or General Motors is not getting $25 billion while AIG has got $150 billion. Mr Obama would have to overcome this bias in policy and put together a radically new plan. This would require him to change his set of advisers and those in the establishment, but that is easier said than done. Mr Obama’s win was like climbing Mount Everest, but can one do so everyday? Or, having climbed it once, can that become a habit? The world needs it to be so. Will Mr Obama, a left-leaning suspect in the eyes of the conservatives, be cautious and play safe? This would be tragic since there is no option but to carry forward a radical programme. His self-imposed limits will determine his achievements or failures and those of the world in the coming years. If he could take on the establishment in the economic sphere, there would be hope that he could also do so in other aspects of life.

Global Financial Crisis and Government Intervention: Surplus Generation, Gearing Ratio, Asymmetry of Financial Multipliers and Other Considerations

2008-11-11T18:06:00.003+05:30

Global Financial Crisis and Government Intervention:
Surplus Generation, Gearing Ratio, Asymmetry of Financial Multipliers
and Other Considerations

Arun Kumar
CESP/SSS, JNU, N Delhi 110067.
arunkumar1000@hotmail.com.

Published: 'Accountancy Business and the Public Interest' Vol. 8, No. 1. February 3, 2009.
http://visar.csustan.edu/aaba/aabajourVol8-No1.html

I. INTRODUCTION: CRISIS NOT ANTICIPATED BY THE EXPERTS.

II. MONEY, RISKY FINANCIAL ASSETS AND UNREGULATED INVESTMENT BANKING

III. PROFITABILITY OF FINANCIAL INSTRUMENTS AND CONSEQUENCES.
III. a. Financial Assets and their profitability
III. b. Anatomy of the Financial Crisis

IV. BASE FOR FINANCIAL ASSETS CREATION: IMPACT OF LOW US SAVINGS PROPENSITY, WAR EFFORT AND TAX HAVENS

V. MONEY, MULTIPLIERS AND GOVERNMENT INTERVENTION IN A CRISIS
V. a. Non-Functionality of the Multipliers
V. b. Limits to Government Intervention in a Crisis: Asymmetric Multipliers

VI. CONCLUSION.

End Notes.

References.

Graphs

Completed: November 11, 2008

Abstract of the Paper:
The paper analyses the roots of the current global economic crisis and the reasons for the failure of the massive government interventions to control the crisis.
The paper tries to understand whether the crisis is a generalized crisis of capitalism or a specific crisis originating from the financial sector. If it is the latter, a reform of the financial system would have been enough to resolve the crisis but if it is the former then a more basic solution would be required.
The paper analyses the deregulated financial markets and the nature of their instability. The paper presents a simple model linking the returns on financial instruments to capital gains and the gearing ratio. As the gearing ratio rises, the instability increases. Further, the paper points to the inter locked balance sheets of the financial institutions so that as collapse sets in it spreads from one to the other. It points to the fact that when the asset values fall, liabilities do not decline in value to that the balance sheets have big holes in them and this is particularly the case due to the provision of mark to market.
It traces the trigger for the instability in the real economy to rising disparities, the growing challenge to the dollarization of the world economy, rising speculative activities, falling savings propensity of the US economy so that more and more of the assets of the US economy were being owned by foreigners and the surplus generated in the US economy was going out. This was being aggravated by the growing use of the tax havens and the rising war effort and the internal security expenditures. All this led both to the creation of the sub-prime assets in the US economy and their eventual collapse.
It is pointed out that in the current crisis, trust has disappeared amongst borrowers and lenders and credit has frozen. Entities wish to remain liquid. Consequently, the money multiplier is tending to one and the financial multiplier to zero. In the circumstances, the monetary authority’s steps to reflate the economy become ineffective even though under normal circumstances, they would have led to hyper inflation. The economy appears to be in a liquidity trap. Fiscal steps also do not yield the required results due to the downward adjustment of the private sector’s expectations about profits and investments.
The paper points out that an orderly reversal of the financial markets is not feasible because while there maybe micro reversibility there is macro irreversibility. It is like in a random walk where each step can be reversed but the probability of going back to the origin is low.
The paper discusses the need for global coordination of fiscal steps otherwise demand may leak out and leave the economy trying to inflate itself in deeper crisis. It points to the dangers of countries going in for protectionism and suggests that the architecture of the International financial institutions is likely to change because the US position has been severely dented. Further, it suggests that the free market paradigm is likely to undergo a rethink and there would be greater receptivity in the public to alternatives.

Growing Uncertainty: Time to Invest in Real Economy

2008-11-05T18:23:00.000+05:30

Growing uncertainty: Time to invest in real economy
by Arun Kumar
The Tribune, November 5, 2008.
These are extraordinary times, so strange and unexpected things occurring should not surprise us. The only thing predictable is that one cannot predict correctly (that also applies to the Indian cricket team!). The US government, after promising under different heads a few trillion dollars, seems to be fighting a losing battle with the economy steadily declining.
The Indian government, after so much song and dance in the last few years about the need for strict adherence to FRBM, has thrown it out of the window by announcing huge expenditures. Much was also made of the RBI’s autonomy but that is also a thing of the past with the government requiring it to act quickly and, of all things, it has released almost Rs 2,70,000 crore of liquidity in a month — an unthinkable amount till recently.
The latest data from the US economy points to a worsening economic situation. For the first time in several decades, consumer expenditures have dropped and that too sharply. Worse, this data is for the quarter immediately preceding the big pain induced by the collapse in the financial sector in mid September. So, analysts have argued that the last quarter of 2008 is likely to be much worse.
There are straws in the wind, suggesting that the recent rise in the stock markets is a blip. Reports suggest that the largest insurance firm AIG, which has been given a total bailout package of $123 billion, has more or less exhausted this amount in a month. The bailout of $ 85 billion announced in September looked huge but another $38 billion had to be given and even that has disappeared into a bottomless pit. How much more would be needed by the AIG?
That depends on the liabilities on its books and how much have its assets degraded in the present situation of rapid economic decline. All this indicates the difficulties that every business, and not just financial institutions, may be currently facing. All of them may be headed for difficulties because the assets on their books have lost value with the decline of the markets while their huge liabilities may be intact. The balance sheet may have huge holes.
The largest Japanese bank, Mitsubishi Financial Group that took equity in Morgan Stanley to bail it out, is now in trouble. It is trying to raise an equity of $10.7 billion. The shares held by Mitsubishi have fallen in value by 40 per cent. This has shaken confidence not only in Japan but also in the rest of the world. So entities that may look healthy at one point of time and may be asked to bail- out the not-so-healthy ones may themselves be in trouble very quickly not only because they took on another collapsing entity but because their own portfolio has degraded — not in years but in days and months.
The clear lesson is that given the disastrous financial situation worldwide, one does not know which entity is headed for trouble in the coming days and months. Under the circumstances, every entity is protecting itself. One way to do so is to become conservative and not trust others, not invest, etc. This becomes an added source of trouble.
The situation has gone out of the control of governments as far as the financial markets are concerned. The losses in the books have become so large that even the governments do not have the resources to save these entities. The monetary authorities have lost their power to regulate since their instruments are now blunted by the loss of trust and abnormal events in the economy. They may lower interest rates, but investments in the current situation of growing uncertainty will not rise. They may release money but it will simply sit with economic agents since they do not want to take on fresh commitments and want to stay liquid rather than commit funds. In brief, demand has collapsed.
The real economy is being severely dented since most businesses have also indulged in buying the financial instruments that are now in trouble. After all, they like to make as high a profit as possible and the financial markets were promising that and luring all and sundry — everyone was trapped by greed.
An Indian conglomerate bought a Europe firm at what was then thought to be a high price. Today the price of that asset would have collapsed in the market but the debts taken to buy the company would stand. The financial situation of the firm must be poor. The same company also bought two more firms later for the sake of prestige and again they would have taken a hit. How this firm would fare in the coming months is a moot question.
Assocham put out a report that soon some major industries will retrench in a big way. Not so surprisingly, within a week, they have withdrawn the report under pressure for the government which is still claiming that the economy would grow at 7 per cent. Is this feasible, given that the industrial growth has fallen to 1.5 per cent for the latest month and major parts of the tertiary sector, like the financial sector, hotels, tourism, trade, travel and housing, are seeing sharp declines? The Finance Minister has claimed that more jobs would be generated this year than during the entire NDA regime — a poor game of political one upmanship.
The problem is likely to aggravate as time passes because the world economy is headed into a prolonged recession or even a depression. Major Indian industries are likely to slow down or show negative growth. Can industry carry surplus labour in times when its bottomline is being hit due to lack of orders and build-up of inventories? Its losses can only mount even faster and it would sink sooner than later unless a national strategy is worked out as to how India will cope with the coming difficult time. There is no point in living in denial and not preparing.
Malaysia delinked itself from international capital flows in 1997 to save itself from the ongoing economic collapse in South-East Asia. The US and the IMF lectured it then for wrong policies but later held it up as a model for others. We also need to protect our interest and not open ourselves indiscriminately. The FIIs brought in funds but now they are withdrawing and leading to the collapse of the stock market. The government is opening up the insurance sector to greater FDI. In these times when the insurance sector is also in deep trouble (AIG being the biggest one) where will these funds come from? If they do come, would they also not try to quickly exploit the situation to shore up their parent companies, etc?
We need to invest in our real economy, keep employment up, encourage investment and keep our savings moving within the economy and not let them leak out through opening up the sector. Are we learning anything from anyone? If not, that is not unusual but a part of the predictability.
arunkumar1000@hotmail.com

Financial Crisis Worsens: Public Needs to know the Truth

2008-10-11T17:17:00.001+05:30

Financial crisis worsens: Public needs to know the truth
by Arun Kumar
The Tribune, October 11, 2008.
Foreboding headlines confront the middle and the rich classes, the primary savers in the economy. They are quaking at the rapid depreciation in their wealth. Stock markets, mutual funds, real estate, etc., are down. While the going was good, they dreamt of a life of luxury but now they don’t know where to duck.
The financial analysts and the reassuring noises by policy makers had lulled them into believing till early this year that the good days would last forever little realising that the story could go horribly wrong in six months. Such was the euphoria, that those cautioning prudence were seen to be Cassandras of doom.
Ben Benarnke, the Fed chief and Paulson, the US Treasury Secretary, the two people at the top of the heap of the global financial markets were assuring one and all in August 2007, at the start of the sub-prime crisis that matters were under control. Not till February 2008 did Benarnke suggest that something was remiss. It was on September 19, 2008 that both said that the USA faced a deep financial crisis and that the $700 billion bailout package was necessary to save the system from collapse. But with the system continuing to spin out of control, is there a con game all the way through?
The Finance Minister and the Deputy Chairperson, Planning Commission, the two worthies in charge of the country’s financial planning, followed a similar path, assuring the country that India is insulated and that growth would remain intact at around 8 per cent while it can slip to 5 per cent or less.
On October 8 with international markets tumbling, in spite of the coordinated intervention by the central banks (an unprecedented step), Indian markets also followed suit. They stabilised because of the old game of government-induced intervention by certain institutions. The Finance Minister came out of a Cabinet meeting to say, that there was nothing to fear and more liquidity would be infused into banks. He said that Indian banks have strong balance sheets and no one need worry about the safety of deposits. The FM, a lawyer-politician is no economist and maybe excused for not comprehending what is going on.
But the Deputy Chairperson is an economist. He is reported to have said, “ … when normalcy is restored (in global financial markets), normalcy would also be restored to stock markets”. He apparently added that stock values are not a measure of the country’s economy and that stock markets are always more volatile. What a turn around? The government was till recently suggesting that the stock market rise reflected the economy’s performance. However, it is the first statement that needs analysis since it is vacuous.
When would normalcy be restored in global markets? It does not appear to be in sight. In spite of the trillions of dollars being poured in by governments a collapse has set in. In February, a tax cut of $ 160 billion was said to be adequate and then a few hundred billion dollars to take over Fannie Mae and Freddie Mac and AIG was thought to be adequate. Next, $ 700 billion was thought to be adequate and then a coordinated rate cut but the markets continue to collapse. As mentioned in this author’s piece in these columns (February 6, 2008), this is a case of `too little, too late’.
The situation is a dynamic one with matters deteriorating rapidly and faster than anyone is able to anticipate. As argued by Kaldor, once expectations turn negative, nothing helps and that seems to be the current world situation. There is a complete lack of trust so that institutions are running scared, the financial markets are in a state of freeze and liquidity has dried up. Further, the real economy which was already slowing down in 2007 has rapidly gone further downhill. The US has lost close to a million jobs. Now even the IMF has woken up and predicted a slowdown/ recession. The implication is clear that with the real economy sliding, profits all across will tumble and businesses may go broke. Under the circumstances, all investments are uncertain and financial markets already in turmoil can hardly revive. Even companies and banks that today look safe may rapidly sink into losses.
The recent past is a good guide to all this. Even in June 2008, the demise of WaMu, Lehman Brothers, Merrill Lynch etc., the nationalisation of Fannie Mae, Freddie Mac, AIG etc., and the spread of the contagion to Europe could not have been imagined. The decline of Dow Jones to below 10,000 or that of Sensex to below 11,000 were in the realm of impossible. One of the big Indian private banks is 19th in a list of 36 risky banks in the world. Even tiny Iceland faced bank failure. Not only has all this happened, much more is feared in spite of the various packages.
A projection of all this into the future is frightening and a turnaround is not in sight. Hence when the Deputy Chairperson of Planning Commission said “when normalcy returns” he should honestly also add that there are few prospects of that in the near future and no one really knows when that may happen. Was the public being conned?
Analysis of the international financial markets over the last 20 years suggests that an unsuspecting public has been conned. Many were sucked in by greed and invested in unsafe instruments (even the Chinese Central Bank) due to the con job pulled off by the financial experts/advisors. The FBI is reportedly investigating Lehman, Merrill and AIG for possible fraud. While the markets rose, everything seemed to be as scripted but few asked what if the script went horribly wrong as it has done now. Even the most savvy financial experts have lost because they had also conned themselves and invested in the instruments that are now sinking. An NRI steel tycoon is reported to have lost over $16 billion in the last four months in spite of his battery of financial advisors.
The financial sector is not buying the turnaround story and continuing to collapse. It cannot trust others in this dynamic situation where what is apparently safe today can be risky tomorrow so that any investment can turn bad and they can themselves be the next victim. Hence, government bailouts are being treated as good to clean up one’s own balance sheet and improve one’s situation but not good enough to trust anyone else.
The nightmare of a bad script is with us but the con job continues. Rather than admit that the problem is systemic and needs an overhaul, policy makers the world over are busy fire fighting and not doing a basic reassessment which would require a change in priorities. They are attempting to shore up the collapsing financial structures which seem to be beyond repair and ignoring the real sectors of the economy which could react to stimuli much more quickly. A paradigm shift is called for but that requires a mind set change which the current breed of policy makers are proving to be incapable of because of their predisposition(s).

The US Financial Crisis: Collapsing Sand Castles

2008-09-30T18:53:00.000+05:30

The US Financial Crisis: Collapsing Sand Castles.
Arun Kumar.
Published in The Tribune, September 30, 2008.
Since August 2007 the crisis in the US financial system is big news. It is the deepest crisis in the last eighty years. Initially, the US establishment denied that there was a crisis. A deteriorating situation forced a financial package of tax cuts and bail out of Bear Sterns. Then came the crisis of the two housing mortgage giants, Freddie Mac and Fannie Mae. After much dithering the government took over these two companies to prevent a collapse of the US financial system. From not admitting to a crisis to accepting that if it did not act, the whole financial system could collapse was a long journey for an admittedly right wing government that has preached to the rest of the world the powers of free markets.
There followed a sigh of relief in the financial markets that they had escaped the inevitable collapse. But that was premature since three of the biggest global financial players collapsed. Lehman Brothers filed for bankruptcy; no one was willing to buy/bail it out. Merrill Lynch was sold to BankAm for a bargain price and AIG was almost on the verge of collapse and with that it appeared much of the financial system was teetering on the brink. Again after dithering, the US government stepped in by putting together a bail out package. The markets recovered.
However, confidence was now at such a low ebb that no one was willing to trust anyone else and lend to them. This has undermined the financial systems because they run on trust between institutions that lend and borrow amongst themselves. There exist layers upon layers of financial assets with little solidity because all the actors were building castles in the air and convincing each other that they were solid - much like the kings clothes which did not exist.
The inevitability of a collapse of the US financial edifice is now apparent to the policy makers in Washington and the financial institutions all over the world. Hence the US government and the Legislature are putting together a massive $700 billion bail out package for the financial industry. Counting all the bail outs in the last one year, the government is giving to the financial institutions about $ 1 trillion. This is about $3,000 per US citizen or more than India’s annual production.
However, trouble continues to brew since it is not clear how this bail out package will work? How will the assets be priced in a market where their prices are collapsing? If they are bought at higher than current prices, it would be seen as a dole to the super rich financial players. If the assets are priced at current prices, the crisis would continue with more institutions failing over time. Indeed, news is that Washington Mutual is also going under.
Perceptive analysts have been pointing out that unregulated financial systems are a bubble waiting to burst. Keynes had pointed to this danger and so had Minsky in the late seventies.
However, increasingly over the last 50 years it is the world of finance that had become politically and economically powerful and it manipulated policies to have its functioning more and more deregulated. This accelerated with the onset of Thacherism in the late Seventies. In the Nineties, Greenspan the ruling US deity propagated this philosophy and believed that markets are self correcting – how erroneous.
Diehards suggest that the US government is turning socialistic. But, the bail out is for the private financial markets to stem problems for the real economy. Subsidies are for the rich and not the poor.
The real economy had been suffering due to the collapse of the housing markets, rise in food and energy prices and the consequent decline of the automobile industry etc. Since January, more than 700,000 jobs have been lost. This decline in the real economy is linked to the growing financial crisis - a two way linkage (See this author’s article in EPW of July 12, 2008).
An understanding of the functioning of the financial markets will help analyse the reasons for the collapse. Money is created by deposits and their lending in the commercial banking system. For security, a certain percent of the deposits are held in the Central bank which acts as the lender of last resort guaranteeing the entire system. This assures the depositors that their money is safe and they can get it back when needed. The banks are regulated by the Central bank so that they follow prudential norms.
Outside this regulated system, newer financial institutions, like the Investment banks emerged which started trading in financial instruments. They used their own funds and those of their clients to leverage more funds and buy financial assets. High profitability was assured as long as the prices of assets rose. The movement of funds in the financial markets were hundreds of times greater than the real output. The profits of the financial sector were based both on squeezing the surplus out of the real economy and by creating a speculative bubble which yielded capital gains.
This was an unstable situation. If, for any reason, the asset prices declined then just as huge profits were generated, big losses would follow. Billions of dollars of capital of Bear Stearns, Fannie Mae, Freddie Mac and Lehman Brothers was wiped out in short time and they had to go for sale or bankruptcy.
Three additional factors need to be factored in. First, the low savings rate of the US economy which has meant that the rest of the world holds a large part of the capital in the USA. Secondly, the war in Iraq and Afghanistan has been bleeding the US economy and eroding its asset base. Finally, super profits have been spirited out to off shore banking channels (of which there are 77). Thus, the financial bubble has been backed by a smaller and smaller base of real output and US owned assets.
All this was leading to the decline of the dollar, thereby aggravating the crisis for the US because the rest of the world started to move away from the dollar. This weakened dollars status as a reserve currency. The USA is not able to export its deficits as easily as earlier. The swelling bubble had a crumbling base and the US economy fell into a vicious trap so that even a small disturbance was enough to deflate the financial bubble. The trigger was the collapse of the housing market followed by the sub-prime crisis.
The above also explains why it is the US financial system that has faced a crisis and not that in other developed countries. However, given the global reach of the US financial system and the integration of the markets, the crisis will hit other economies including those of the developing countries. India will be no exception (See the author’s article in these columns, February 6, 2008) with its stock markets in turmoil, FIIs withdrawing money and the leveraged buying by cash rich companies likely to face a crisis.
In brief, given that the US financial assets are backed by a small real base the government bail out worth $ 700 billion is unlikely to stem the crisis. The US budget deficit is likely to balloon and create fresh problems since the rest of the world is unlikely to hold this uncertain asset which can also collapse. The crisis is systemic and a Tsunami is moving in.

Understanding the Faltering Naional and Global Growth Prospects

2008-07-20T18:14:00.000+05:30

Understanding the Faltering National and Global Growth Prospects
Arun Kumar
Economic and Political Weekly, Vol. 43, No. 28. July 12 - 18, 2008.
In the week ending January 5, 2008, the WPI based inflation rate in India was 3.8% and the year was expected to close with a growth rate of 8.5% with the industrial sector growing at about 10%. By April, this rosy picture had undergone a dramatic change. Currently, the rate of inflation has gone up to 11.45% and the latest figures for industrial growth show a slump to about 5%. Trade deficit is rising rapidly. Infrastructure growth has also come down sharply, and various services, like, financial services, software, trade, real estate, air travel and tourism are in the midst of slow down. If this continues, could the rate of growth in 2008-09 go back to the earlier rate of growth of 5%?
There have been straws in the wind for the perceptive. Some of these indications within the country have been, the narrow growth path of the Indian economy which makes it prone to instabilities, the rising food and energy prices and slow down in growth. Internationally, the western front is not quiet with crisis brewing on many fronts. Like, the sub-prime melt down in the USA leading to a financial crisis in the financial institutions and in the stock markets globally. Losses have run into tens of billions of dollars for the largest financial corporations and the US government put together a bail out package of $180 billion.
According to the latest indications, the US stock market has entered a bear phase. The US economy has slowed down and has possibly entered a recessionary phase with employment dropping since January 2008. This has led to rising uncertainty in the world economy, including a recession in Spain, falling business confidence in Japan, slowdown of industrial production in Thailand and Korea and retail sales decline in Hong Kong and falling corporate profits in China. To complicate matters, prices of petroleum products are rising sharply, global food prices are ruling at high levels and the dollar has declined in relation to the other major currencies. Are these all inter-linked or separate events? This article analyses the causes of this sudden change in the economic scenario in India and the World.
What is alarming is that the policy makers misread the situation so much that they have been caught unaware and have not at all been prepared for it. Recently, in India, the spokesperson of the ministry of finance said that the rate of inflation will continue to be double digit and nothing much can be done about it where as till a few months back it was being confidently predicted that the rate of inflation for 2008-09 would be about 5%. Today, there is an element of throwing up of hands. The public needed some assurance that the policy makers are on top of the situation rather than hearing that nothing can be done.

1. Decoupling debunked.
Policy makers in India had internalized the idea that the Indian economy would be insulated from the major worldwide changes and that they are in control of the economic situation and can continue to coax growth by giving more and more concessions to business so that investments rise. For a while, during the growing financial crisis in the latter part of 2007, a decoupling theory was being propagated by analysts suggesting that the downturn in the US economy would be compensated by the strong growth in China and India. According to these experts (and Indian policy makers), the world economy would be able to weather the gathering storm and India would do well.
Any serious analyst should have realized that for this to happen, for every 1% drop in the rate of growth of the US economy, the rate of growth of these two economies would have to go up by 4 percentage points each which is unlikely to happen given that these economies have been already growing at about the maximum that they can achieve. Further, this rise in the rate of growth has to be a coordinated one which is rather difficult to achieve. Finally, given the strong links of these economies with the US economy a slowdown there was more likely to result in a drop in their own rates of growth rather than a rise and that is already playing itself out. The idea of decoupling is now safely buried under the tattered illusions of the optimists.

2. Slowdown in India: Its Causes
It has also been on the cards that the Indian economy was going to start slowing down after 5 years of strong 8%+ growth since 2003/04. After all it had picked up this growth from a lower base of about 4.7% rate of growth in the three year period 2000/01 to 2002/03. This is a classic pattern of a business cycle – of ups and downs.
Based on the strong rise in the savings and investment rate in the economy in the last 6 years (from 23% to about 35%) the government has argued that the economy has transited to a higher growth path in the first decade of the new century. While this argument is correct in the short run, a classic lesson of a business cycle is that investments continue to rise in the recession phase and as capital stock accumulates, over capacity builds up, resulting in cut back in investments with a lag and then a slump. What can prevent this slump is a strong anti-cyclical public investment programme if initiated well in time but today with the economy following the neo-classical path which requires a strategic retreat of the state, this has neither been initiated nor is it likely.
Further, under the grip of the new policies, government has given concessions to big business so that corporate profits have risen dramatically in the last 6 years and raised disparities markedly (AES, 2007). This major shift in national income in favour of the corporate sector is the underlying cause of the sharp rise in the savings and investment rates. But this kind of rise in inequity in the economy also makes demand narrowly based and, therefore, makes the path of growth rather narrow and also unstable. Growth has been dependent primarily on investments and that too of the corporate sector (risen from 5.5% of GDP in 2001/02 to 12.4% in 2006-07). Any setback to the investment process of this section would immediately lead to a sharp decline in the investment levels and to the reduction in the rate of growth of the economy. Over capacity can be one such trigger and there are indications of this.
Uncertainty in the Indian stock market which is now globalized and takes its cues from the major economies of the world has already taken a toll of investments in the economy. The booming real estate market had grown too fast and was expected to go into a correction phase and there are signs of that. There is over capacity here and the earlier boom in investments in construction is petering out. Infrastructure sector has considerably slowed down. Thus, there are signs of a slow down in investments and build up of overcapacity in some sectors and this is leading to a fall in the rate of growth.
Rising levels of inflation based on a rise in food and energy prices can only result in a worsening of the income distribution in the economy. 93% of the work force is in the unorganized sector and by definition their wages are not inflation indexed so that they lose income share in a phase of rapid rise in the rate of inflation. It is this section which has a narrow consumption basket with heavy dependence on food and energy. Thus, a dramatic rise in the food and energy prices in the last 6 months has affected it the most. Amongst the various consumer price indices, the one for Agricultural labour has risen the most. Thus, demand for goods and services from this segment can only fall.
The organized sector worker is also getting squeezed due to its reduced bargaining power. Trade unions the world over have weakened. Further, the WPI based inflation index is way out of line with the actual inflation faced by this segment of the population. They consume a substantial amount of services and these are not factored into the inflation index (AES, 2006). In the recent phase the prices of many of these services have risen substantially due to greater privatization and the decline of the public sector. One may mention medical expenses, school fees, entertainment, house rental and water as examples of this trend. Thus, inflation indexation of wages, even for the organized sector workers, is inadequate and even this segment will have to cut back demand.
In brief, mass demand is weak and this cannot be compensated for by the rise in demand from the well off sections linked to the corporates who constitute a narrow segment of the population. The data from the NSSO 61st round for 2004-05 presented in the Report of the National Commission for Enterprises in the Unorganized sector (GOI, 2007) shows that 77% of the population consumes less than Rs 20/- per person per day and 96% consumes less than Rs 48/- per person per day. The consumption base is indeed narrow. Even in PPP terms it is not too flattering.
Often incomes are presented in PPP terms to show that the economy is much larger than when measured in dollar terms. But this would make little difference to broadening of demand. Usually, it is argued that in PPP terms the Chinese and the Indian economies are much larger in PPP terms and they can generate a lot of demand for the world economy. Expressing expenditures of the poor in PPP terms (the majority of the population) makes little sense since it is their low wages that are the cause of services (non-traded) being cheap and due to which the value of the rupee turns out to be higher in PPP terms than in $ terms. They themselves consume little of the services they provide since their consumption bundle is heavily weighed in favour of food and energy and other basics which are tradable and have one price (adjusted for taxes and transportation) in any case. It is only for the better off sections that measuring incomes in PPP terms makes a difference and they in any case have high incomes and savings so would not give a big boost to demand.
This picture of very low expenditures by Indians gets modified somewhat when the substantial black economy which mostly escapes the official statistics is taken into account. As shown in Kumar (1999) the black economy was 40% of GDP in 1995-96 and was concentrated in the hands of the top 3% in the incomes ladder. The size of the black economy is likely to have gone up rather than down but let us assume it is unchanged. The implication of all this is that income distribution is even more skewed and the consumption propensity even lower than what official data suggests. Yet, it is this section of the population with substantial black incomes that really constitutes the consuming class in the economy. Since, this is a narrow segment it cannot keep up the growth of the economy on its own, especially when investments begin to decline. We need only recall that the previous high rate of growth of the economy in 1995/96 petered out in two years and fell in 1997-98. The situation today is worse if anything.

3. International Trends
The above mentioned national trends overlie the international trends. Since the Indian economy is substantially globalized, it gets impacted quickly by the global trends.
The world economy has also witnessed rising disparity, whether in China, Russia or the USA. Thus, the base of growth everywhere has narrowed and the world economy as a whole has been open to increasing instability. Since mid 2007 it has been triggered by the financial markets that have grown increasingly complex and are little understood even by experts. That is why the sub prime market collapse and its consequences were not anticipated by the experts. The decline of the dollar has added to the complexity confronting the global financial markets.
The US economy was slowing down and as soon as the sub prime crisis surfaced, the housing market went into a tail spin with foreclosures. A large number of the poor have been most adversely affected. The US economy slowed down rapidly and has been losing employment since January 2008 which is a sign of a slide into a recession (defined as a fall in GDP in two successive quarters). Of course, recession has not been declared but data comes with a lag and we may learn later that the US economy went into a recession in early 2008.
The slow down has also been on the cards due to the strong rise in petroleum and food prices. This has adversely affected the poor the world over, including in the USA and has contributed to the slowing down of the economy. Rise in petroleum prices has also affected several industries, like, the automobile, travel and tourism and air transport. The middle classes in the USA are also feeling the pinch and this is further slowing down demand increasing the chance of a slide into a recession.

4. Dollar No More a Safe Haven
In earlier phases of sharp increases in petroleum prices, in 1973, 1980 and 1990, the petro dollars used to come back to the US economy since dollar was the reserve currency but now that is hardly the case. The dollar has declined against most major currencies of the world so that suddenly it is no more a safe haven. The huge overhang of dollars in the world economy, a remnant of the past export of the US deficits is adding to the problems. Also, several oil exporting countries are now delinked from the dollar so that the oil based surplus funds are looking for alternative investment opportunities.
This means that the US cannot any more export its deficits like in the past and cannot spend its way out so that it is likely to remain in a recessionary/low gropwth phase for much longer than in the past and since it is the largest world economy, this is going to set everyone else also back. The oil surplus countries are suspected to be investing in commodities to take advantage of shortages and this has driven commodity prices higher and led to the inflation that we are witnessing and this further slows down the world economy. Since the financial markets are in turmoil the petroleum surpluses cannot go there either. The avenues for investment are few and, therefore, there is further destabilization of the world economy.
There have been discussions regarding whether the recovery from the slow down will be V shaped or U shaped. That is, whether it will be a quick or a gradual recovery. This is based on the past experience when the above mentioned structural changes had not taken place and so many adverse factors had not come together at the same time. The US economy could spend its way out but since that option is now limited, one needs to discuss whether recovery can take place with the current policy framework and how soon in a far more complex macroeconomic framework.

5. Impact of the Petroleum Economy
OPEC has argued that output has not been falling in the recent phase. Further, it is being supplemented with bio-fuel production. It is estimated that if these fuels had not come into the picture, today crude prices would be higher by $30. It is also known that demand has been rising slowly in the past few years, so, why the sudden spurt in prices of crude oil?
The rise in petroleum prices have resulted in huge surpluses for the oil exporters and the oil companies whose profits have soared. This is simultaneous with the non availability of safe investment channels, like, securities, stocks or currencies. It is believed that the surplus funds have moved into speculation. In NYMEX, after 2002, speculative activity in Oil has increased 5 times more than trading activity. Further, it is suggested that demand is increased by the build up of reserves by those who are betting on rising prices, including some national governments. This is also a kind of speculation.
However, some analysts point to difficulties with production for some producers and especially some Non OPEC oil producers. Output has fallen in Nigeria and Mexico and stagnated in Russia and Venezuela. There are disruptions in production in Venezuela, Iran, Iraq and Nigeria. Most of these are linked to actions and/or threats by USA. Consequently, spare capacity to raise production has fallen. This has also signaled price rise and consequent big increases in profits of petroleum producing companies. One may ask where are these profits being invested? Given the current scenario, what better investment than in oil itself.
Some experts argue that one cannot put the blame on speculation and there is a disequilibrium due to demand not declining even after the massive rise in petroleum prices. In earlier phases of oil shock in 1973, 1980 and 1990, demand had fallen but this time that has not been the case. So, given the inelastic demand, prices had to go up.
However, the definition of speculation used by these experts differs from that used by those arguing that speculation is taking place in the petro product markets. Speculation means buying on the basis of expected prices. If price is expected to rise, inventories may pile up with producers or futures prices reflect in current prices and everyone pays more expecting prices to go up later. Further, one may ask, with petroleum goods prices going up, demand has gone down or stagnated, so, since output has not fallen, why should prices go up under normal conditions of supply and demand? Indeed, the times are not normal and inflationary conditions rule so that for the same good, people pay more with little resistance. It gives the impression of inelastic demand. Prices may indeed fall after a while but in the meanwhile the speculators make their profits.
One interesting aspect of the rapid rise in crude oil prices is that it has not fed into general inflation in most economies, especially in the advanced countries. This is in sharp contrast with the earlier oil price shocks that resulted in high inflation. This is a result of the weakness of labour in the current economic phase. Wages have lagged behind and absorbed the shock. But this has also resulted in the narrowing of the demand base.
In a different vein, it is also worth considering that the price of petro goods is low in a long term historical sense given its rich organic content. In that sense it should be priced far higher than even its current high price. However, no one is using this argument, not even those who suggest that it is not speculation that is governing the current price. Even the environmentalists look at it in terms of energy price and the need to conserve energy, etc.
In brief, terms of trade have shifted from the oil importing to oil exporting countries and this is squeezing demand in the world economy which the oil exporters are not going to be able to compensate for and given the tendency to use the oil surpluses to speculate on commodities, it only accentuates the slow down. There is another terms of trade effect between commodity exporters and importers but that cannot compensate for the primary cause of the changes, the oil price increase. So, the adverse effect on demand is likely. Finally, the dollar is getting weakened by the oil surpluses not coming to the US economy.

6. The Changing Balance in the Food Economy
World food production has continued to rise even if slowly in 2006 and 2007. However, price rise in food items has accelerated in 2007 and 2008. In 1999, grain stocks were at their peak at 580 million tons and by 2007 they have almost halved. This signaled to the speculators that they could speculate successfully.
Less than half of the grain produced in the world is going into direct consumption so that instead of being a source of nutrition, it has become a source of commerce and that is the big problem for the food economy (and the poor). Today, global agribusinesses and speculators dominate the scene and increasingly control the world food economy. Small farmers in the developing world are marginal to the process and they are a major part of the hungry in the world.
This situation has come about over the Nineties because of the logic of free markets propagated by the IMF, the WB and the WTO. They have argued that liberalized free markets will take care of any problems, especially in the food markets, by efficiently allocating resources, etc. Countries were assured that self sufficiency was not required since they could simply import when there was a shortage. This was also the advice given in India and implemented at that time by the current top Indian policy makers.
Free markets were supposed to take care of shortages, etc. Following such advice, Indian food markets were substantially opened up. Consequently, acreage has shifted from less profitable grains to the more profitable commercial crops so that the per capita availability of food has declined in the country (as suggested in Kumar, 1994). Food availability has fallen from 510 grams per day in 1990/91 to 444 grams per day in 2005/06 (GOI, 2008). Since the better off sections are continuing to eat more and better, it is the poor who are losing out and that is why 50% of children and women in India remain malnourished. This has also happened in many other countries in the world. In brief, food security has been dented the world over.
Fertilizer companies, grain trading companies, like, Cargill, seed companies like Monsanto and pesticide companies like Syngenta are making more profits and so are the food processing companies like Nestle and Lever. Retailers, like, Walmart have increased profits from food sales. So, everyone in agri-business is reaping higher profits at the expense of the people.
Amongst other factors, in China, due to urbanization and industrialization, acreage under food has dropped by 6% between 1997 and 2007. In India also, agricultural land is getting diverted to mega projects –power plants, steel plants, highways, airports, SEZs, etc. Further, rising energy prices lead to less use of fertilizers and a fall in productivity. Finally, due to rising prices of oil, bio fuel production has grown. In the US, corn used for ethanol production amounts to 20% of the production, thereby aggravating food shortages.
Low income countries with a larger share of food in the consumption basket are being more strongly affected and will face a more difficult current account position (both because of food and petro products). It is also being suggested that the food exporters are trying to panic the countries into accepting the new GM technology package in the name of increases in productivity and facing the challenge of shortage.
In brief, the energy and the food sectors have got inter linked in a way that is detrimental to the poor people and the poorer countries. The cropping pattern shifts are aggravating the situation further. The rising indirect demand for food from the well off sections has added to the food insecurity faced by the poor. All this in the context of the earlier advice to the developing countries that they need not worry about food security is proving to be detrimental to their national interest. There is an international shift in terms of trade due to the food price rise also but this is relatively small compared to the oil price effect. Finally, food price rise is also leading to a terms of trade shift within the national economies and that is the big effect. It is not only leading to inflation but given the weight of food in the developing countries’ consumption basket, they are leading to a slow down in demand and a down turn nationally.

7. Conclusion
Today, there is growing disparity the world over, rising financial uncertainty, weakening dollar, falling share of labour in GDP and speculation in commodities. This paper has pointed to the interlinkage amongst these problems and how they are together forcing the slow down in the world economy. These trends have resulted in the rising petroleum prices and also through diversion of acreage to bio fuels to rising food prices. This has become a vicious cycle for the poor. Further, since the US economy cannot spend its way out in the changed situation, the prospects for a deep recession are high
The rising disparities cause the tendency for under consumption to aggravate and high rates of surplus generation driving investment are likely to result in over production. This is not just true for India or the USA but for the world economy as a whole. The rise in food and energy prices will affect the BOP of the poorer countries more adversely. The poor everywhere and the poorer countries are likely to bear the brunt of the down turn as is usually the case. There is no decoupling to protect India’s growth and its rising rate of investment is likely to result in excess capacity that would cause the downturn to accelerate. While every situation has some positives, like, India may get more outsourced jobs from companies trying to reduce costs or people may shift to smaller cars or surpluses from commodities may flow to some of the poorer countries, etc., the global macroeconomic effects will overwhelm these micro level changes.
Since the problem is structural and not emanating in any one aspect even though the trigger may have been the financial markets, it can only be resolved by a reform of the structures of the current global economy and the national economies. Since the current orthodoxy in the world economy only understands the situation in one way, it is incapable of providing the needed structural reform whether in the financial markets or for the new global situation of absence of a reserve currency. Consequently, the current slowdown turning into a recession promises to be both deep and long.
In India, Government has suffered from complacency because it was `feeling good’ about the record rate of growth (even though there maybe some doubts as to how good it is AES, 2007). Hence the turn around in the economic scenario has come as a shock. Further, since it swears by the current orthodoxy and has little idea of how to change the present policy framework. It is clear that when the going was good, the government could have done more to ward off the impending problems but it was not willing to consider this and now that the scenario is turning adverse, it is likely to do even less, thereby aggravating the problem.

References:
Alternative Economic Survey. 2006. Over-estimated growth and under-estimated inflation. N Delhi: Daanish Books.
Alternative Economic Survey. 2007. The Macro View. N Delhi: Daanish Books.
Government of India, National Commission for Enterprises in the Unorganized Sector. 2007. Report on Conditions of Work and Promotion of Livelihoods in the Unorganized Sector.
Government of India, Ministry of Finance. 2008. Economic Survey 2007-08.
Kumar, A. 1994. Proposals for a Citizens Union Budget for the Nation for 1994‑95. An Alternative to the Fund‑Bank Dictated Union Budget for 1994‑95. Mimeo. Presented to the Citizens' Committee on February 12, 1994 at Gandhi Peace Foundation, New Delhi. Prepared for the Preparatory Committee for Alternative Economic Policies.
Kumar, A. 1999. The Black Economy in India. N Delhi: Penguin (India).

Bhutan and the Happiness Index: Learning the Art of Patience

2008-06-17T19:47:00.000+05:30

Bhutan and the Happiness Index: Learning the Art of Patience
Arun Kumar.
Enlarged version of ` Index of happiness: Let’s learn lessons from Bhutan‘ in The Tribune, June 17, 2008.
Last month, the PM was in Bhutan, a unique country. It is the one country that whole heartedly believes in a Happiness Index and not the much touted Per Capita Income as a measure of the well being of its people. The PM must have observed an unhurried life, progressing at a slow pace and seems to have learnt the value of patience. Consequently, he advised fellow Indians to patiently wait for the rising tide of inflation to ebb in due course.
The idea prevalent in modern society that time is money is alien to the Bhutanese who need not rush about trying to make the next quick buck. Perhaps for them after a day’s work, happiness comes from spending time with each other, in the family or the community or contemplating at the local Monastery. In their scheme of things, material prosperity is not the end all of existence. Not for them a scramble to change their recently bought TV for the next HDTV or a Plasma. Or, go for a new model car or the cell phone every few years, etc. They are strangely happy in the traditional dress and do not hanker for the next fashion from Paris.
How quaint, they must be wrong to believe that no one carries the goodies accumulated through toil and trouble to wherever one goes (if at all) after death. By that logic, they suggest, why spoil the present by wasting time making needlessly large sums of money to accumulate goods that will be left behind. The modernist would say how backward, forgetting that she/he would have little time from the 9 to 9 job to enjoy the company of their families in their plush museum like home. It is only a place to sleep to start the next 12 hour day and is populated by aliens. In the Happiness Index physical happiness is only one of the seven things – rather funny.
Do the goodies that we accumulate give us happiness? Not necessarily, especially, if we are all the time dissatisfied because we do not have what our neighbour or friends have. Further, we may be in the rat race to have something that others do not have - to be exclusive. That is illusory since sooner or later others will also have that and then we would search for something more exclusive, so happiness is transitory, and dissatisfaction the norm.
If the aim is happiness, then, leaving wealth is not a high priority since the next generation in such a society would also be happy and contented independent of the wealth. Clearly, happiness maybe derived from factors other than wealth. In such a society, no high pressure advertising to make one feel inadequate and compensate for that by consuming more and more of banal things - more and more of the expensive things that require one to work harder to earn more. Rather than do the simple things one goes after the complex and expensive. For instance, replace the alum by the after shave. Simplicity preserves the environment and promotes happiness while the modern life does the opposite.
It maybe argued that one can know one’s happiness but not that of others. So one should be satisfied with one’s own happiness and not worry about that of the collective – become an atomized individual. Further, it is difficult to say if one is happier today than one was yesterday so why worry about the past (or the future), just look at the present – become short termist. One can only say with certainty that if one gives to someone they would be happier and since one cannot give to all, give to friends to make them happier. So, rulers who have their constituencies need only benefit this group to increase its happiness and consequently their own.
The PM, on being quizzed by the usually `unhappy’ and `cynical’ crowd of ‘curious’ journalists about the roaring inflation and the unhappiness of `aam admi’ thought of trying out
his newly acquired wisdom and advised the `aam admi’ to be patient. After all, he had promised them `hamara hath’ when he had started his term in 2004.
Perhaps, to people who are happy, time matters little. Would a few months here and there matter in Bhutan; so with the newly acquired knowledge, the PM said, by September (4 months later) prices may come down. That was not all, given the faith in God in Bhutan, something the `aam admi’ seems to be losing in spite of frequent visits to godmen and devis, he suggested that his statement would turn out to be true if the rain gods were to oblige by showering their bounty on the country.
Further, because some ignorant individuals have been demanding tough steps against the businessmen and traders indulging in profiteering and because he had just learnt about happiness, he said that he would advise against any such measures. It would cause unhappiness to these people. Thus, by a master stroke, he found the mantra for keeping everyone happy – the `aam admi’ could be happy by exercising patience in spite of the troubles he faces and the business community, secure in the knowledge that no tough steps would be taken against it.
If, in this view, there is any hint of a one-sided view of happiness then it is only an error on the part of those who think so. After all, can one be happy if one’s friends feel unhappy because of the tough steps taken against them? And, today, the government’s best friends are the businessmen. The country’s prosperity is measured by how happy they are; acquiring companies abroad or building 45 story mansions to live in or buying Rs 5 crore cars. If national media is to be believed, happiness is to be measured by how well the stock market is doing and let us not forget, it is controlled by less than 0.1% of the population (the business community). Today, in India, the businessmen’s happiness depends on how soon they can become billionaire.
To become billionaires, businessmen need high profit margins for which prices have to be raised and wages kept down to a minimum and the stock markets need to be manipulated through various devices, like, insider trading. High profits are also possible through manipulation to obtain concessions from the government. One of them in the last few years has been taking over the lands of the hapless farmers and giving them a tiny fraction of what the businessmen would make. Earlier Japan was called Japan Inc but now India has become India Inc.
Another way is to resort to the black economy which generates about 50% extra GDP. Indians apparently have huge amounts of black wealth hidden abroad in various tax havens, like, Liechtenstein. Can one forget that the current Punjab CM accused the former CM of spiriting money out of the country? And, just the other day, was it not the other way around - only a question of who is in power. Is it any different in UP or TN. As someone sang, `Maujan hi maujan’.
Germany which acquired the data on who has stashed how much money in Liechtenstein (by paying Euro 4 million to a dissatisfied banker) has offered the data (for free) on the Indians who have deposited their money there. But why would the PMO wish to hurt its friends since their happiness would decline, so it is avoiding obtaining this data? Getting the data is dangerous since it might also reduce one’s own happiness by making enemies. Remember Narasimha Rao who inadvertently opened the Pandora’s box of havala and had to lead the last part of his life fighting cases against himself. Fixers can fix you also. Is there a stalling tactic so that accounts maybe closed and the government could claim that the data on CD is false.
It is no secret that when the PM was the FM, he overlooked all the scams taking place all around him. When the stock market scam was going on he said in Parliament that he would not like to lose sleep over the rising stock market prices. And, when the JPC wanted to quote him, there was a storm and the JPC had to change that part of its report.
Then there were the sugar and the fertilizer scams and so on - the largest number under any previous FM. Some of them were huge involving over a thousand crores when the previous biggest one was the Bofors, involving perhaps Rs. 100 crores at best. When the real friends are happy then one’s happiness quotient goes up and one can live life king size or become the PM. One only need ignore any wrong doing by one’s friends and in all this patience is of essence.
Rising food prices lead to big profits for businessmen and becomes a source of happiness. International traders in food are happy and are laughing all the way to the bank. And so are the international oil companies. Rising steel and cement prices lead to high profits and more happiness for the manufacturers and dealers of these commodities. And so on, the happiness index marches on.
The general public remains happy on strong doses of patience. Bhopal gas affected have not got justice for more than two decades, Irom Sharmila in protest has not eaten for 7 years (is force fed), farmers are continuing to commit suicide, workers are thrashed in Gurgaon, Prof Aggrawal has decided to go on fast unto death because of what has happened to the Ganges river (the most revered river), Binayak Sen is incarcerated in jail for more than 12 months for being a doctor in the most backward part of the country, the Narmada displaced await settlement for years and so on. If justice was automatically done, how would patience be inculcated. For sixty years people have heard of trickle down with few drops coming their way. The golden future is always just ahead. In 1991 it was in 2005, in 1999 it was in 2020 and now in 2030.
Trust is a prerequisite to happiness but today, one cannot be sure if the doctor is taking the patient for a ride by prescribing unnecessary tests to line his pockets or the melon one eats has not been injected with chemicals or the spinach sprayed with deadly pesticides. Indians wanting to be happy are following the individual route of instant happiness by cutting corners and making a quick buck – Bunty and Bubbly style, selling the Taj Mahal. Sparrows and vultures are disappearing, the rivers are heavily polluted and the air we breathe in the metros is like cigarette smoke. Public has to take all this in its stride and patiently wait so that the business community can be happy with 9% growth.
Well being of the citizens comes from systems that are responsive but increasingly that is not so in India and the happiness index is sliding. This is not the case for the PM or the FM or the corporates. One needs to distinguish between the happiness of a small group and that of society. The neo-classical concept is based on utility maximization with lip service paid to social welfare maximization. No chance of any other calculus than profit and loss entering the consciousness – forget their being seven attributes in the happiness index.
The new mantra is that the `aam admi’ has to be patient and grin and bear it rather than protest or take to the streets. Only the happiness of the police increases in this because they get to thrash the protestors who become an unhappy lot. So, the new optimality (meaning, all sections are happy) of the economist is that the businessmen make a lot more money and the rest patiently wait for their lot to improve in the future. Is this what we have learnt from our little neighbour, Bhutan (or is it from Washington)?

Current Inflation: Deconstructing the Underlying Social Factors

2008-05-30T18:21:00.000+05:30

Current Inflation: Deconstructing the Underlying Social Factors.
Arun Kumar
CESP/SSS, JNU, N Delhi 110067.
Enlarged version of the article Published in The Tribune, May 13, 2008.
Appeared in the Mainstream May 24, 2008.
Introduction: Why Unanticipated?
Inflation is suddenly big international news. Till the other day, in the Economic Survey in February end and the RBI quarterly report in January, there was no indication that we were facing an impending sharp rise in the rate of inflation. “Overall inflation is likely to remain moderate in coming months, as the policy measures taken during the course of the year work their way through the system.” (Economic Survey, 2007-08, Para 4.65 (p. 84)). “These measures have supplemented the various pre-emptive monetary measures undertaken by the Reserve Bank since mid 2004 and helped in containing inflationary expectations.” (RBI Macroeconomic and Monetary Developments Third Quarter Review, January 29, 2008. p.56).
Is this surprising, given that important functionaries in the government act like sales persons constantly praising their products and hiding its flaws. The FM giving a spin was happy to note that the inflation rate is stable at 7.5%. The PM on return from Bhutan admitted that inflation is a problem but advised the countrymen to have patience and hope for a good monsoon. Is that the assurance the country needed? The credibility of senior functionaries is being eroded and that dilutes the policy making powers.
The PM, FM, Chairperson of the Advisory Council to the PM, etc. have said that inflation would soon be brought under check but the public seems unconvinced, even if that actually turns out to be true in, say, 6 months time. The rate of inflation coming down means prices still rise but less fast. It is like a bus that is reducing its speed (decelerating) but still moving ahead. So, lowering of the inflation rate means prices still rise and not fall.
The government has taken a slew of steps to control inflation but these seem to have had little impact as yet. These relate to export duties to reduce exports of foodgrains, lower import duties to bring down domestic prices, curbs on forward trading, announcement of expected bumper harvest and increase in procurement. All these are expected to slow down inflationary expectations.
Blame is sought to be put on external factors like the worldwide food shortage and the rise in energy prices globally. Indeed, international prices of food and Petro products have risen rapidly in the last few years and more specifically in the last one year. Why has all this become apparent to policy makers only in the last two months when the inflation rate suddenly went up? Why could this not have been anticipated given the international trends? Is our leadership so short sighted that it cannot foresee what is about to happen a few months from now? If that is the truth, how can the public trust the prediction that the steps now taken will succeed in curbing the rising inflation – there is a clear contradiction?

Perceptions about Inflation
It is argued that the rate of inflation in India is not high compared to say what it is in other countries, like, Zimbabwe, China, Russia or South Africa. Several things need to be understood as to why at even low levels of inflation, political tempers begin to rise in India. First, since a substantial number of people live in extreme poverty (below the poverty line) in the country and these people have no indexation for inflation or any kind of social security, they face a crisis in their lives even with a moderate increase in prices, especially, when these happen to be food prices. In 2004-05, they spent more than 65 per cent of their monthly bill on food. Even this was inadequate to give them adequate calories so any further squeeze in this becomes unbearable.
Secondly, not only the extremely poor but those who are just poor who live at less than Rs 20/- per capita per day, and constitute 77% of the population (according to the Unorganized Commission Report) find any rise in food prices hurtful (they spend more than 60% of the budget on food). In a consumerist society where demonstration effect is strong, many amongst these aspire to buy goods other than the most basic. They cut their basic requirements to do so. However, when essential goods prices rise, they see their aspirations evaporating and their dissatisfaction rises – they have already cut their essential goods consumption to the bone and cannot cut it any further.
Thirdly, the farmers would benefit from the food price increase. However, usually they are not the ones getting the major share of the increased price of food because only the well off amongst them have the holding power. Many of them are indebted and have committed to supply their crop at given prices to the local traders and lenders. It is often noticed that the price received by the farmer for the produce at the farm or even in the Mandi may be a fraction of what it sells for in the urban consuming centers. Then of course there are the large numbers of marginal farmers who go to the market to buy a large chunk of their requirements. Unambiguously, only the rich farmers benefit from the food price rise. For the rest in agriculture, there is a gradation of loss.
Fourthly, the middle classes, aspiring to consume beyond their not inconsiderable means feel aggrieved. The upwardly mobile are in debt so that as prices rise, they need to borrow more and are squeezed by larger installments of payments, hence feel unhappy.

Services Sector Not Included in Inflation Figures
Fifthly, and critically, the government announced inflation rate does not represent the true effect of price rise. As discussed in the Alternative Economic Survey 2006-07, the Services sector is grossly under represented in the various measures of inflation – wholesale or consumer price indices. The well off sections are consuming more and more of services and their prices are rising fast (like, for education and health or tourism) or new services are being added to the consumption bundle (like, internet and mobile phones) leaving less for spending on what was previously being consumed. Thus, family budgets are under greater strain causing dissatisfaction even among the well off.
Imagine, there was a time, when there were no malls to go to and do impulsive buying. There were no credit cards that allow one to buy even if one’s pockets are empty. Earlier there were no Baristas or Café Coffee Day to go and spend Rs 30 or more on a coffee. A tea in a dhaba at Rs 3 was the cup that cheered. One went to an IIM at Rs 4,000/- per annum and not the current Rs 5 lakh per annum at IIM-A. A hotel room at Rs 1000/- per night has gone up to Rs 5,000/- per night. A visit to a movie by the kids has risen steeply by 5 times. Earlier a smaller per cent of the population had asthma or cancer or diabetes or blood pressure and, worse, the treatment for all these has become hugely expensive with the ongoing privatization of health care. Earlier in a middle class home when there was one land line, now there are perhaps an additional 2 to 3 cell phones with family members so that bills have mounted even if the unit cost of the call has come down. Electricity rates are much higher and so are bus and auto fares. None of this gets counted in the inflation index. Thus, family budgets are being eroded much more than what the government’s inflation implies.
Finally, it is the businessman and the corrupt who are benefiting the most from the inflation. Money from the pocket of the buyer goes into the cash box of the seller. Their collective profits and incomes have been shooting up in the last six years as shown in the Alternative Economic Survey of 2007. These sections are able to splurge even more than earlier and that is creating further demonstration effect and disquiet. To the middle class family whose child has not been able to join the corporate sector or if it is not in a position to generate some illegal income, something appears to be desperately wrong – others are marching ahead while they are struggling to retain their position in the pecking order.

Global Factors
Globally Crude petroleum prices have risen ($126 per barrel compared to $50 last year) and affect us since we import 70% of our requirement. The short sightedness of our policy makers who have been propagating energy intensive development is apparent. It was hoped that the rise of the rupee in relation to the dollar would help lower the inflation rate. But with energy prices rising even faster, this effect has not been visible. It has only moderated some of the possible price rise.
Global food shortages are affecting international prices of food stuff. Our net imports are 3 per cent of our consumption of food but since we are much more integrated into the world food markets due to the WTO regime, we are also affected. Wheat, rice and oilseeds prices have gone up sharply. Diversion of land to produce bio fuels is one of the causes of growing shortage. In the USA, corn used to produce fuel now accounts for 20% of the grain production. Further, in China, land is being diverted from food production to urbanization and industrialization. Drought in Australia has reduced production there. In India agricultural land is getting diverted to SEZs and other mega projects. Global stocks have fallen to about half in the last few years and this is signaling the developing crisis in the food economy. According to the UN, 3 billion people are food insecure now and 18,000 children die of malnourishment daily. A large percentage of these are from India.

Mr. Bush’s Take
We have allowed our food security to be dented by going in for more of cash crops or by letting investments in agriculture stagnate and decline so that we are not able to produce foodgrains faster than the increase in population. Consequently, our per capita food production has fallen after 1991. But the rich are consuming more indirectly through increased intake of meat and poultry, thus leaving less for the poor. One unit of meat requires up to 6 units of food and one unit of poultry requires two units of food. Since the Nineties, the current policy makers have argued that food production is not critical since we can import if we have foreign exchange reserves. The chicken have come to roost – we have more than $ 300 billion of reserves but are struggling with rising food insecurity.
Mr. Bush spoke a partial truth that India’s (and China’s) rising prosperity (in per capita income terms) is putting pressure on global food prices. As pointed out earlier, our net imports are not much higher; it is the global supplies that are the problem. Further our per capita consumption of cereals and pulses has dropped between 1991 and 2005 from 510 grams per day to 440 grams per day because the poor are not even able to afford what they could earlier (This trend was anticipated as early as 1994 in the Alternative Budget).
The rising consumption by the well off is being over compensated by the decline of the consumption of the poor. No wonder, malnourishment amongst children and women is so high. If we are eating less on the average and importing roughly the same as earlier, how can India be one of the causes of the rising food prices? What Mr. Bush fails to see is the enormous waste of food in the USA where obesity is a problem and where only 30 per cent of the food consumed is absorbed by the body.
Another important cause of the rise in food prices is the moderation in the subsidies that used to be given to food products. This is not only a result of the WTO related pressures but under the New Economic Policies after 1991, to reduce the fiscal deficit, subsidies were required to be curtailed. Further, under these policies, PDS was expected to be scaled down. This was an important instrument of release of food into the market to keep prices in check. Thus, even if the poor did not get food from PDS, they benefited from the moderation of prices in the market. Successful running of the PDS did require subsidies for moderation of prices and as subsidies have been curtailed, its role has declined.
With elections approaching, businessmen have become emboldened to raise prices. They feel they can get away with speculation, hoarding, cartel formation, etc. If there is a small shortage, speculation makes the shortage greater. Suppliers hold back supplies to make a profit later and those wanting to purchase, try to buy more than they need currently so that they can hope to save on costs. Thus, the supply demand gap widens and prices shoot up more than necessary. Futures trading by making more money available to speculators aggravates shortages. Similarly, the entry of Corporates (Indian and foreign) with deep pockets in the food markets also leads to aggravation of speculative activity and adversely affects prices. Anticipating price rise, they would buy more and increase the shortage.

Steps by the Government
In the case of cement and steel, the government has pressed the cartels to bring down prices but this may prove to be temporary. It is the recent request/intervention of the PM that got some action from the cartels but this is unlikely to last long. For instance, right after the Union budget, even though excise duties on steel were reduced in the hope that prices would be lowered, steel manufacturers raised the prices rather than lowering them or holding the price line. There are many such cartels (like, the IIMs) in the economy.
The government could do a lot more but acts reluctantly given its market oriented philosophy. For instance, it could act against hoarders and force them to dehoard the stocks but the steps taken appear to be lukewarm at best. This reluctance leads to delays and the situation tends to slip out of control.
The PM has said he is against drastic steps and the public should be patient – wait for steps to have their effect and for a good monsoon. He has clearly expressed his preference for business whose growth is more important than the suffering of the people due to the inflation. Could he not have done the opposite, request business to have patience and lower its huge margins on the basis of which it has produced the second largest number of billionairs in the world in one of the poorest countries? That would benefit the public by lowering the rate of inflation? Did the PM pick up anything from the Bhutaneese people’s unique experiment with the human happiness index – people matter more than anything else.

Conclusion
A viable and active PDS system is a good check to successful hoarding and evening out shortages amongst the population but as noted earlier, this has been run down deliberately and little is being done to revive it. The government’s recent announcements that the food crop is a record one and that procurement is much larger will help lower inflationary expectations but that maybe temporary. Further while there are international reasons for the high rate of inflation, there are strong internal ones also that are entrenched in the development path we are currently pursuing. Small instabilities and gaps in supply and demand quickly become big ones given the global influences. Globalization needs to be revisited. The government needs to remove its pro corporate blinkers and face reality that its policies are leading to higher inflation and social discontent.

arunkumar1000@hotmail.com.

Identifying the Elite:Air Travel is not the Right Indicator

2008-04-01T18:18:00.000+05:30

Identifying the elite: Air travel is not the right indicator
by Arun Kumar
Mrs Sonia Gandhi, inaugurating the new airport in Hyderabad, is reported to have said, “… air travel was not elitist anymore”. With airports jammed and congestion in the air leading to delays in take-off and landing, many would come to that conclusion. However, saying that more people are travelling by air now compared to five years back is not the same thing as saying that it is not elitist anymore. Who do we consider to be elite in India?
The statement reflects the view of our top leadership about society. It is particularly important since it is Mrs Sonia Gandhi who moved the Congress to its evocative slogan, “hamara hath aam admi ke sath” and it helped the party regain power in 2004. Further, it is she who forced the powerful trio of PM, FM and Dy Chairperson of the Planning Commission who believe in the pro-corporate and pro- rich policies based on the neo-liberal philosophy, to accept the NREGS and now the farm loan waiver scheme. Thus, she has been the ally of the poor in the Congress party. Yet, her statement reflects where her empathy is.
The Unorganised Sector Report based on the NSS 61st round (2004-05) shows that 77 per cent of the population lives at less than Rs 20 per day. So, most people would hardly even use trains, much less flights. Those who do use the railways mostly travel by the ordinary unreserved compartments in our trains. The overcrowding of these compartments suggests that a vast majority does not even have the money for reservation, much less AC or air travel.
The statement is similar to the argument that India is prosperous since a large number of people use cell phones. In the metropolitan centres one can spot a rickshaw-puller or a gardener flaunting a cell phone. However, this does not signify that these users are able to afford these gadgets or are better off than earlier. They may be cutting other expenditures, perhaps on essentials for the family, like on food or education of their child. High-pressured advertising and peer group pressure is known to force people into irrational choices where they sacrifice their essential expenditures for the sake of prestige, etc.
Can one say that those who consume alcohol are able to spend enough on food for the family? It is well known that many of those who drink heavily leave their families destitute. Women’s movement against drinking in Andhra Pradesh in the mid-nineties focused on this. The plight of many such families moved Gandhiji to demand prohibition.
Malnourishment among children and women is higher in India than in Sub-Saharan Africa. Food consumption per capita has declined in the country after 1991 and this has affected the nutritional status of the poor, children and women. To argue that those who do not have adequate calories are eating more of high value food does not stand scrutiny. Production of one unit of meat takes six units of foodgrains and of one unit of chicken takes two units of foodgrains. So, as the well-off sections consume more of these items, their per capita consumption of foodgrains rises even though their direct consumption may fall. Since the overall consumption per capita is falling, the brunt of this decline in the average would fall on the poor who are in no position to go for higher-value food items.
The confusion regarding who are the elite is similar to that of who are the middle class in India? By definition, those who are the middle of any ordering of the population can be called the middle class. In India, if we classify the population by their incomes, then 500 millions would be in the middle. But these are not the middle class as understood in the international context of the “consuming classes”.
According to the survey, in 2004-05, only 4 per cent of the population (numbering 44 million), at the top of the income ladder and categorised as the high income group, spent more than the princely sum of Rs 48 per person per day. This category spent an average of Rs 93 per day. Thus, in reality, even these people can hardly afford air travel in spite of the drop in air fares. It is quite likely that given these figures, less than 1 per cent of the population or about 11 million people would be middle class and would be able to use air travel. This is certainly also the elite unless for any arbitrary reason one wishes to call the top 0.1 per cent as the elite.
There is a catch: these figures are based on the reported data. The economy has a roaring black economy which now accounts for about 50 per cent of the GDP. Much consumption is based on these incomes, but surveys do not capture it. Just as the black income earners do not reveal their black incomes, they also do not reveal their consumption out of the black incomes. So, consumption in the economy is higher than revealed.
But black incomes are concentrated in the hands of, at the most, the top 3 per cent of the population and so it is they who have the extra consumption and not the poor. Actually, the rest suffer since they have to pay bribes, etc, to line the pockets of the top 3 per cent and they have to curtail their consumption. In brief, at most 3 per cent of the population would be able to afford air travel, but would this still not be the elite?
Mrs Sonia Gandhi could have said that the elite need air travel because they travel frequently. What her statement indicates is the distance between our leaders and the common man who lives at less than Rs 20 per person per day. Even Big B is reported to have said that now poverty is a thing of the past. How insulated the top is from the reality — blinded by “India shining”?
All this is not surprising given the fact that our leadership rubs shoulders with the rich in India and abroad and not with the common man. Even the party of the Dalits demands from aspirants for its election tickets a donation of a few lakhs of rupees, if not more. Lakhs are spent on birthday bashes and big diamonds sported. In Parliament, designer clothes are flaunted which perhaps cost as much as the yearly expenditure of the common person’s family. To attend Parliament, MPs are known to fly in daily in their private planes.
The top leadership rubs shoulders with this lot and socialises with them on a daily basis. Recently, for the wedding of his son, one CM gave an invitation card package estimated to cost Rs 15,000 per invitee. The top leadership is imitating the businessmen in their lavish lifestyle. As they say, a person is known by the company he keeps. They do not any more identify with the destitution of the common man.
On days when the leaders make a political show of their concern for the poor, they make speeches to them or to hired crowds looking like the poor. Or, they pay a flying visit to the villages and slums and wave at the common people since they are cut off from the masses by the security bandobast. Unlike Gandhiji, they do not go and live in their midst. Empathy with the poor is missing. The leadership does not even need it because others also do the same and there is no competition. The statement that air travel is no more elitist when hardly 1 per cent of India uses this mode of transport is bereft of an understanding of the country; a bit like the Queen supposedly saying that if they do not have bread, let them eat cake.

Impending Recession: India Unlikely to Escape its Impact

2008-02-06T18:19:00.000+05:30

Impending recession: India unlikely to escape its impact
by Arun Kumar
www.tribuneindia.com. Feb 6, 2008.
The world economy is faced with a downturn. The issue is how deep and how quick it will be. The Prime Minister and the Finance Minister are trying to keep the flag flying and rallying the troops so that the rout is delayed. It is variously being suggested that India will not be affected by the downturn in the US economy which, according to some analysts, is already in a recession but since the data comes with a delay, it has not been officially acknowledged that the recession has started. The cuts in advertising expenditures in the US are an indication of the downturn.
The stock markets the world over are indicative of the negative mood of the investors. Adverse news is being greeted by huge declines in the indices. The US Central Bank, the Fed, has already cut interest rates twice in quick succession by a total of 1 per cent (unprecedented in recent history) signalling/acknowledging that indeed things are bad. In the US, for the first time in many years, employment is falling.
The Indian stock markets have also followed the overseas markets in the rapid fluctuations and more so because it was way beyond what the fundamentals justified. Indian industry and exports have been showing signs of slowing down. Due to rising inequality, the market in India is narrow and dependent for growth on investments and exports. Without doubt, exports will be adversely affected by the slowdown in the US.
Investments are likely to slowdown because of the industrial downturn and also because of the international trends. Both these factors will result in unutilised capacity appearing and leading to slowdown in investments and in the rate of growth. The rate of growth of the economy which rose on the back of a rise in the investment rate (from 25 per cent to 32 per cent) can show an equally dramatic fall. We may be back to a 4-5 per cent rate of growth which prevailed five years back.
The economy has been facing infrastructure bottlenecks, like in power and transportation. The food prices have been rising resulting in inflationary pressures and political problems. Oil prices have been high and even if they moderate due to the recessionary tendency, they will cause pressure on prices and profit margins. In other words, the problems already confronting the Indian economy leading to its slowdown will be aggravated by the international trends.
The optimists have been suggesting a decoupling between the US economy on the one hand and the EU and Asian economies on the other hand. It was being suggested that the growth momentum in the latter would compensate for the downturn in the US so that the world economy would still sail through with a minor slowdown. Indian analysts depending on this have been arguing that India would not be badly hurt by the slowdown in the US economy. They argue that India is not a large exporter and so the affect of slowdown would be small.
This line of argument misses the central point that now many of the markets are fairly integrated with the international markets. That has been the central point of the Structural Adjustment Package (SAP) being implemented in India since 1991. Even without full capital account convertibility, we have had elements of it. FIIs and NRI funds can come in and go out. Indian businessmen have been allowed to keep capital abroad, etc. Thus, the financial and real estate markets have been substantially integrated with the world markets. No wonder what happens abroad has immediate impact on Indian markets.
We have known that energy and food markets are integrated the world over. We have been witness to the impact of oil prices and rise in wheat prices. Thus, many of our markets are now open to influences from abroad. While it is true that we are not as open as many other economies (like Germany or Sri Lanka), we are twice as open today as we were in 1991. Hence the US economy has a much bigger impact today than earlier. Given the size of the US economy, a 1per cent reduction in its rate of growth would be bigger than a 10 per cent increase (to 20 per cent and that is unlikely) in the rate of growth of the Indian economy.
It may be argued that the cutting of the interest rates in the US and actions elsewhere will have a positive effect and prevent a downturn there. President Bush has announced a $150 billion package. He is putting purchasing power into the hands of individuals to boost demand. This would be about 1 per cent of the US GDP. However, what individuals may have lost in the sub-prime markets may be much larger and hence inadequate. Further, the decline in the stock markets and the fall in the paper wealth is also likely to far exceed this amount.
In other words, some feel that this effort may be too little, too late. There is nothing unusual in this since in business cycles it has been mostly found that in the downturn, intervention is usually too little too late so that the downturn becomes inevitable. In Japan, in the nineties when the interest rates even turned negative, the economy could not pull itself up.
The reason is that once the investors’ sentiments turn negative, there is little that the government can do to turn them around. This situation is currently aggravated by the free market philosophy where any form of government intervention is seen to be bad and, therefore, resisted till it is too late. Even when it does come, it is of the wrong variety. Governments following free market philosophy give concessions to the investors, hoping that they would invest more. However, because demand does not rise and unutilised capacity continues to rise, they invest little and the concession simply ends up raising unutilised capacity further. The medicine aggravates the disease.
Usually, in the downturn, the poor and the poorer countries are affected worse than the rich ones. For instance, the impact of the sub-prime crisis has been the greatest on the poor and the blacks in the US. The situation is being aggravated by the environmental consequences of the development path being followed in the recent past. With environmental costs of growth rising in a recession, the poor will suffer even more.
In India, where large infrastructure projects had been planned and companies were rushing to raise capital from the booming stock markets, there would be over-capitalisation and consequent losses. Indian companies have also been rushing to acquire expensive overseas assets. Such companies are likely to suffer substantial losses.
For India, the negatives seem to far outweigh any positives. Further, the impending slowdown/recession/depression in the world economy is likely to be quite different than the earlier ones since it is being driven by substantial unresolved problems in the financial sectors. No one, not even the largest actor on the scene, the Fed, understands what is going on so that correctives are hard to devise. Once the economy starts going downhill, many actions that would have been normal in a rising economy, like acquisitions through leveraging, investments in risky instruments, turn out to be mistakes. The various mistakes cumulatively amount to huge mistakes. Indian financial markets, substantially integrated into the world markets, are unlikely to be able to escape the impending crisis.

Share Market Gyrations: Thwarting National Policy Making

2007-10-29T18:25:00.000+05:30

Share Market Gyrations: Thwarting National Policy Making
Arun Kumar
The Tribune, October 29, 2007
The share market has been giving the investors the jitters. Few know which way it would go next. Recently, after touching a peak of 19,198.66, the BSE index came down to 17,559.98 and more such fluctuations are in store. This was not unexpected given the rapid rise of the index in the preceding 2 months and especially in the preceding 2 weeks. Investors were getting used to hearing that the index had climbed by 1,000 points in 6 or in 4 trading sessions. It was a bullish market which seemed to have no stops. The media and specially the pink papers with screaming headlines were egging the investors on with stories of investor wealth going up by lakhs of crores and how Indian businessmen were becoming the wealthiest individuals in the world – and all this in a space of a few months. Heady stuff for a country which is still one of the poorest country in the world and 50th from the bottom in HDI ranking. Greed had been raised to a new high pedestal.
The news has been that foreign funds were investing heavily in the Indian markets. They are supposed to be attracted by the rising value of the rupee vis-à-vis the dollar and the high returns being offered by the Indian companies. There are several components of this flow from foreign shores. Rising oil prices have resulted in growing surpluses with the oil exporting countries and they have been looking for avenues to invest. Since the dollar has been declining, they are wary of parking all their funds in the US and in dollar securities so they have been looking for alternatives. The Indian markets which have been rising because its corporate sector has seen a massive surge of profits seem to provide a safe haven of high returns. What could be better than this?
The second component of this flow is the NRI funds which is also looking for diversification of portfolios for much the same reason. Till recently, they brought only little of their savings back to the country but now they are doing so in bigger amounts. According to the just released World Bank report, India is now the largest recipient of non resident transfers in the World. The third component is the flows from the high export earners like China who are also looking for safer havens and diversification to park their surpluses and reserves. China and Japan have over a trillion dollars of reserves which till recently were mostly in dollar related securities. The fourth component is the movements of funds by terrorist organizations, money launderers and smugglers, etc. Apart from continuing their political/business agendas in the country, they are also seeking diversification of their financial operations.
In the Indian context, the Participatory Note (PN) route which is a financial instrument operated by the FIIs has provided a new way of investing in the Indian markets in which the investors identity remains a secret. The secrecy is required since there is illegality and possibly criminality associated with these funds. About 50% of the FII funds now belong to this category. India’s National Security Advisor has expressed worry over the operations of illegal money and terrorists through the bourses, to channel funds not only for their own use but also perhaps to destabilize the economy at some point. RBI has expressed worry about this phenomenon and now the SEBI has followed suit.
This route has also been useful for the Indian politicians, businessmen and other corrupt people to bring back their black savings stocked abroad over the last many decades. They can whiten their money through this device. That is why the Indian establishment has not touched this route in spite of the ill effects it is having on the Indian economy in recent times. The Indian businesses have had another important reason to bring back their money, namely, to invest in their own businesses given the need to protect themselves from hostile takeovers. Further, as for others, of late, dollar havens are not all that safe or lucrative as compared to the home market.
Finally, the real estate boom in the last three years has peaked and some funds are being withdrawn from there to be parked in the rising share markets. In other words, quite a conjuncture of factors have fuelled the boom.
The Indian stock markets have been known for severe manipulations by the owners of companies, financiers and brokers who indulge in insider trading and fixing of prices (For an account of this, see this author’s book, The Black Economy in India published in 1999 by Penguin India). It is suspected that the recent boom has come in handy for such unscrupulous elements to take advantage and raise prices further. Often, owners of companies that are not doing well use this device to manipulate the price of their stocks and make huge sums of monies at the expense of the gullible small investors. Media is cynically used to plant stories. All this has been noticed in the past three stock market booms in the last 16 years. Something similar seems to be happening again.
Why do prices not shoot up like this in the mature economies? The reason is that the Indian markets are rather narrow. The organized sector of the Indian economy is less than 50% of the economy and employs only about 6% of the work force. If government is taken out of this, the rest would be the corporate sector which is broadly represented in the stock markets. Thus, the private corporate sector is not more than 30% of the national output and employs only 2% of the work force.
Further, the ownership of this sector rests with less than 0.1% of the population. The public owns only about 10% of the shares of the corporate sector. The vast bulk being held by promoters, FIIs, financial institutions and the like. In fact, a large part of the FII holding also belongs to the friends of the promoters so that no threat of takeover emerges. In companies like WIPRO or Infosys, the number of stock holders is less than a few thousand and the owners and FIIs own around 90% of the equity stock.
The result is small floating stock of shares (especially of the good companies) in the Indian markets and little relationship with the larger economy so that small infusion of funds can cause large price changes. This along with the above mentioned manipulations make the Indian markets volatile. This is compounded by the fact that the return on stocks is largely made up of capital gains and not dividend. Thus, if the market stops rising the expected return becomes very small and then it is not worth investing. In other words, when prices change rapidly, there is no stable resting point for the stock markets. A rapid rise invariably leads to an equally rapid opposite movement. Fluctuating markets do not move with the fundamentals. In fact, most of the time, they are not in sync.
The increase in wealth associated with the stock market book is notional. It is based on small amount of trades and does not correspond to any real increase in wealth. This causes imbalances in the economy because it is concentrated in the hands of less than 0.1% of the economy and spells danger for the country with vast sections getting marginalized and instability in society rising. It results in devaluation of work and weakening of democracy.
In brief, the PN story and the market gyrations suggest that the Indian markets are substantially driven by government policies as manipulated by vested interests. Today, they exercise their influence as members of Parliament, Ministers and member of advisory boards of legislative and governmental bodies. These interests have become accustomed to having things their way so even a slight disturbance comes as a rude shock, like, the news that PN story may be coming to an end because it is not good for the vast majority of Indians. Under the circumstances, can good policy or national policy making other than what suits these vested interests make sense?

nuramarku@gmail.com

The Share Market and The Reality Check

2007-09-13T18:24:00.000+05:30

The Share Market and the Reality Check
Arun Kumar
CESP/SSS, JNU.
The Tribune, September 13, 2007.

The Stock Market in India has been going through a roller coaster. After rising sharply for a few months and reaching a peak on July 24 (Sensex, 15,869), it started fluctuating. It dropped sharply on July 27 (542 points), August 1(615 points) and then on August 16 (643 points). These have been the biggest 3 falls but there have been others, like on August 21, 2007 (438 points). The investor is breathless not knowing which way to go. Some, like the SEBI chief have argued that there is nothing to worry or the Finance Minister has reiterated that the economy is doing well (implying, nothing to worry). The investor is sought to be convinced that the fundamentals of the economy are good and that there is no need to panic.
It is clear that the crisis has hit suddenly, something even the FM or the RBI were not able to anticipate. The recent RBI Report in July made no mention of any such possibility. If those with all the economic intelligence at their command, could not read the coming events, can the investor do better? All this is reminiscent of occurrences in the last 16 years when many have lost heavily. Can the assurance that the fundamentals are good be believed? Two important points need to be kept in mind.
First, the stock market is not always directly linked to the fundamentals of the economy. If it was, with the fundamentals being good, as the Finance Minister and the experts say, why the repeated sharp fall? Compared to the July 24 peak on August 21, 2007, it was down by 12%. Now it is recovering.
The stock market is essentially based on short run expectations. Some expect it to rise and buy to make a gain (the bulls) while others expect it to fall so they sell to make a profit (the bears). At any given time, there are bulls and bears operating to keep the market in equilibrium. If no one is buying (no bulls), the market would collapse as happened on the manic Monday last year. If there are no sellers (no bears) the market would rise sharply. Further, a bull in the morning may be a bear the afternoon. The positions keep switching because of the changing expectations. If the market has risen sharply, some begin to expect it to fall and turn bearish and vice versa.
Short term factors, like, a CBDT circular, the news of FII withdrawing or instability of government move markets. Long term features of the economy and politics also have a bearing but these signals are read in the immediate context and often there are over reactions. For instance, what would be the effect of reservations on the corporate sector or whether the left front is going to push the UPA government harder in the context of the nuclear deal?
What role do the economic fundamentals play? The stock market reflects the health of the corporate sector but they constitute 30% of the output of the economy. Indirectly, this may also reflect the health of the overall economy but often not. Till July 24, when the market rose sharply, it was unaffected by the growing social unrest in the country, increasing criminalization, rising unemployment or the farmers committing suicide. Currently, the declines are due to the failure of the sub prime loans market in the USA which has little to do directly with the Indian economy or its fundamentals.
Even if the fundamentals are important there is no particular level of the stock market indices that is commensurate with a given level of the fundamentals? There is no one to one correspondence between the two. The Harshad Mehta induced boom in 1992 was co-terminus with a sharp decline in the rate of growth of the economy. Similar was the case during the Ketan Parikh induced boom. Yes, the economy has grown at about 8% in the last three years. Does that justify a 250% rise in the stock market indices? The corporate sector profits have risen sharply by about 30% but even that does not justify the rise.
In effect, the sharp rise in the indices has meant that the market has been going out of sync with reality. Consequently, average returns on the stocks have been falling. Why do the investors still invest? Because of the expected capital gains. In a bull market, it is the expected capital gain that drives investments. This is an unstable situation. If the rate of rise of the market slows down, the rate of return falls and the investors start turning into bears. The market tends to reverse gear. The big players with their analysts, control over chunks of stocks and association with brokers are able to see the signs and retrieve some of their positions. Usually in a boom, greed brings in small investors and they are the ones to suffer the losses when the market falls.
The market mostly consists of the big fish. According to published data, in 2004-05 only 1,40,000 individuals bought shares worth more than Rs. 1 lakh – a mere 0.00001 % of the population. Public holding of the shares of the stock markets is hardly a few per cent. Over 80% is held by the big investors. Thus, the small investors are marginal to the market and they tend to get locked in. The losses for the big investors are mostly on paper. The higher valuation during the boom reverses when the market falls but the original capital is usually intact and they periodically book profits.
The second issue is that in times of turbulence, no one is able to predict the market given the uncertainty, the manipulations by the big investors and insider trading. In the case of the sub-prime market collapse, the Federal Bank of the USA was also caught off guard. After the event, many now argue that the bomb was ticking but few predicted it, certainly not the Federal Bank. Indian markets are getting affected because some FIIs are withdrawing money to shore up their US operations which are the more important ones for them. In this situation where do the fundamentals of the Indian economy enter the picture?
In most situations of decline of the stock markets even the finance ministry cannot predict what will happen (otherwise it would take corrective steps). What it usually does is to put pressure on the financial institutions, like, on public sector banks and insurance companies to support the market to prevent a drastic fall. No wonder, the public financial institutions suffer in the process (as happened earlier to the UTI which collapsed). This may be taking place now also.
This is the key to the problem of the Indian small investors. Today, the government’s economic performance is judged by the rise in the stock markets. The Ministry has signaled to the operators that they can be bulls without worry since the ministry would send signals to the right places to support the market, if it falls. The ministry has been favouring the market by diluting capital gains tax and eliminating the dividend and the wealth taxes. But these are precisely the instruments that used to keep speculative activity in check. In their absence, boom and bust are bound to be aggravated. To be successful, one has to successfully predict what the majority will do - know the minds of the FIIs and those indulging in insider trading. No small investor with a little bit of savings can easily do this, so the stock market is not for them.
What the government does not seem to factor in is that the speculative activity in the stock market affects other investments adversely. We need investments in agriculture, small scale industry and physical infrastructure but if one can make money in the short run then why invest in the real economy and get a return much later? A steady market is better all around than a volatile one but the present policies are an anti-thesis of this.
In brief, the US sub prime market, liquidity problems, political turmoil due to the Congress - Left disagreement on the nuclear issue are important to explain the stock market instability but the reality check is the speculation induced by the policy makers to gain brownie points with finance capital.

nuramarku@gmail.com.

Sixty Years after Tryst with Destiny: Woh Subaha Kabhi to Aygi

2007-08-29T18:26:00.002+05:30

Sixty Years after Tryst with Destiny: Woh Subaha Kabhi to Aygi
Arun Kumar, CESP, JNU.
Based on the Article, After `Tryst with Destiny’, Unending wait for the new dawn. The Tribune, 29.08.07.
Nehru’s `tryst with destiny’ suggested that India would wake up to a new day. The country has made substantial material progress since that fateful and historic day 60 years back. WE are consuming more of everything and poverty is supposed to have halved. But the freedom struggle had other goals as well. Countless people `sacrificed their today for a better tomorrow for us’. Have we achieved that better today? Was there not a different vision than the one that we have worked for? Doubts arise not only because mass poverty and illiteracy (though less) persist and insanitary conditions and ill health continue on a mass scale to take a heavy toll but because we hardly have a vision left except to follow the West. In the process we have perhaps got the worst of both the worlds.
In material terms, a few, numbering less than 3% of the population, have done well while the rest are trapped in a low level equilibrium. We boast of more billionaires than Japan while in terms of per capita income we are in the bottom twenty out of 177 nations. Since their per capita income is 60 times ours, crudely speaking, we must be at least 60 times more unequal. Is it something to gloat about. Largest number of people below the poverty line, farmers suicides, huge urban slums, fields in and around cities functioning as vast toilets, the inability of the so called literates to understand modern technology, etc., suggest that the nation as a whole has yet to awake to a new morning. The 3% affluent adding up to 33 million people, a good size European nation, are nested in a vast ocean of deprivation.
In the 1958 movie, `Phir Subaha Hogi’, Mukesh singing with pathos, “Woh Subaha Kabhi to Ayegi” (That morning will come some time), epitomized the dream of the common Indian of the Fifties and the Sixties. Many of us as children internalized the idea that we will build a better future for all our countrymen and perhaps we would build a new civilization that would surpass the West. Sixty years after independence perhaps the shreds of this dream are not even left in the dustbins of those in power and supposedly guiding the destiny of this nation. That dream has been blown away in the hurricane of achieving 9% growth.
The song is not just about eliminating poverty, hunger, ill health and illiteracy but above all about a dream of building a different society – a peaceful one where everyone (specially the marginalized) would live with dignity. Gandhi emphasising “last Person First” suggested that if everyone could hold their head high, no one could subjugate the nation. For him that is what the national struggle was all about – dignity for all. Mukesh captures the present situation in the line, “Miti ka bhi kuch mol magar insano ki kimat kuch bhi nahin” (Even earth has some value but human beings have none).
The song defines that happy morning as “Jab ambar jhum ke nachega, Jab dharti nagme gayegi”. When the sky would dance with joy and the Earth would sing songs. Today, at our low per capita consumption, the air, water and land are terribly polluted and weeping rather than singing and dancing. The most revered Ganga or Godavari are heavily polluted, their beds contaminated with huge amounts of toxic material that would affect the future generations. Even the sacred is no more sacred, so what is sacrosanct? Certainly not the dream of the National Movement.
The song goes “Jab dukh ke badal pighlenge” (when the clouds of sorrow will melt). For the vast numbers of the marginalized sections, sorrow is a daily and endless fare that is not melting away. Dozens of their children can disappear in Nithari and little is done. The only escape is what Bollywood dishes out - sex and violence. The government provides little relief since it fails to deliver. Faith in politicians is a casualty. Further, “Insano ki izzat jab jhute sikkon me na toli jayegi” (when people’s dignity would not be measured by false money). The dignity of the poor is even more firmly mortgaged to money when unemployment is so high and the youth has to take to crime to fulfill its expectations. “Mana ki abhi tere mere armano ki kimat kuch bhi nahin”, (Agreed that today our dreams have no value). But there was belief, one day this would change. The dreams of the deprived have no value to the rulers who in their self centerdness can only see in them the means to fulfill their own narrow dreams of great riches, like, in the misallocation of land meant for the poor displaced slum dwellers of dwellers.
Today labour is devalued while speculation and greed have been raised to a new high pedestal. A mere 1% of the population linked to the corporate sector earns more than what 60%, dependent on agriculture, do. Disparities have risen more sharply in the last 6 years than in the earlier 54 years. The young are encouraged to sell soap but not to contribute to nation building through teaching and research. Sacrifice appears to be stupidity, undermining the entire effort of the freedom fighters. Those of them who still survive ruefully ask, is this what they fought for? Armed forces are losing officers and are understaffed since the private sector is so much more lucrative and why sacrifice since that is no more a virtue. Grab an opportunity if it presents itself – its right and wrong is immaterial – since the only surviving principle is `what suits me is correct’.
The 3%, the ruling elite of the nation aspire to join the international elite, sending its children to study college abroad, going there for vacations or to hospitals for health problems. It is voting with its feet. A school in Chappra or a dispensary in Ghungrawali has little value to it but Delhi must have 24 hours water and electricity. That is progress. Most of the elite, businessmen, corrupt politicians and the corrupt executive have spirited vast sums of money abroad. This is not just for a rainy day but for a possible new life in case of difficulties at home. The emotional attachment with the nation is gone. For the elite, making society better is too much of a struggle.
Going abroad to work is considered highly desirable by society and the young encouraged to do so. More H1B visas are asked for by the government so that the best can go abroad rather than serving the nation. The short sightedness of the vision underlying such a move by the government escapes the ruling elite. Already, the country lacks dynamism and this situation is aggravated by the best leaving the shores. This is reflected in the country having to import most modern technologies since it lacks the ability to develop them indigenously. Even in the defence field where national effort has been concentrated, we depend largely on imports. LCA has been under development for more than 20 years and MBT for 25 years. Commercial nuclear reactors are being imported, etc.
Due to a lack of proper vision, laboratories, Universities and colleges function like offices, 9 to 5. They are largely treated as fiefdoms by the powerful to grant favours to their sycophants. Talent be damned and dynamism is a casualty. We are happy to get low value added jobs in Call Centres and BPOs so that the youth can work as cyber coolies rather than working in highly skilled jobs. We are happy at producing 10,000 world class professionals out of the 10 million who join the work force every year. Most of the best then leave the shores to go abroad. What induced many earlier to return to the country was a vision of a different India. Now since that vision is transformed into making India a poor cousin of the West, why return to face some of the most uncivilized conditions in the world? Anyhow, why sacrifice – that is not today’s value.
Corruption is rampant both in the public and the private sectors. Institutions, like the legislatures, judiciary and the bureaucracy, are breaking down. The elite is lawless breaking every single law – from traffic laws to building bye-laws to industrial and environmental laws. Many of the rich have earned more through illegal means than legal ones. The black economy continues to grow and is roughly 50% of GDP in spite of reduced tax rates and elimination of many controls.
The political leaders hardly represent the people - leading a life of luxury. Democracy is a great institution but in India it has been turned into a fine art for self aggrandizement. The bankruptcy of our leadership led to our jettisoning of the ideas of independent development in the Eighties and of the `last person first’ in the Nineties.
From tall leaders like Gandhi who could give up everything to the present day leadership that cannot give up anything. From the idea of voluntary poverty to the notion of greed as the driving force of our society. From society and nation to the self. A JRD Tata or a Bacchan rated higher than Nehru (or many others) indicates the demise of a national vision and the fall from grace of visionaries. The transition has been made from an inclusive national vision for all to an exclusivist vision for a few. The situation echos the line in Mukesh’s song, “Miti ka bhi kuch mol magar insano ki kimat kuch bhi nahin” (Even earth has some value but human beings have none). Farmers commit suicide in increasing numbers and the rsponse s ineffective packages. In the new vision, making huge airports takes precedence over giving access to clean drinking water and toilets to all.
The land of Gandhi has turned into the land of the bania (not that he was not a bania). There is a great deal of hype about the Sixtieth year of Independence which was not there for the Fortieth or the Thirtieth and this is a reflection of the times when media hype and commercial interests dominate. Anything, including one’s shauhrat (fame) can be encashed – nothing wrong in it. Nothing matters any more – a Tendulkar finds greater satisfaction in advertisiing and running restaurants than attempting to better Don Bradman’s record.
The credit for this U-turn goes to the very party which Gandhi built. Clever ones would shamelessly argue, even Gandhi would have done the same in the present context. Would they consider that a man given to simplicity, sacrifice and truth and not show, half truths and consumerism would have blanched at this suggestion?
From the notion that the ills of our society have a social cause to the idea that the individual is to blame for her predicament, it is a long journey. Everyone now has to go to the market to get what they need, government is no more responsible for elimination of poverty, etc.. The devil may take the hindmost.
The nation can boast of many things in post independence India. A democracy – even if it barely functions under the weight of criminals and corrupt leaders sitting in the legislatures. Better position for some women even if they are now more of a commodity in the market than ever before. Better position for some Dalits even if their leaders are corrupt and repeatedly coopted by the elite. There is more sugar, more clothing and more milk per capita today than ever before but there is more adulteration of food and more lifestyle and pollution related disease than ever before. There are more educational institutions today but their quality is pitiful and hey sufer from rampant corruption. Where are the teachers who could be the ideals for the children to emulate? They would much rather go to coaching classes than spend time with children.
Some people with idealism survive who continue to fight in spite of adversity – carrying the dream forward. Nations are built on dreams but we have narrowed it to money making. So how do we build a great nation as `Nehru’s tryst’ suggested or to which Mukesh referred to in the song, “Jis subaha ki khatir yug yug se ham sab mar mar ke jite aiyen hain”. (That morning for whose sake from eons we all have been living by dying a thousand deaths). Gandhi had a dream for the nation that the party he helped build has shattered.
He perhaps saw what was coming so he wanted the party to dissolve itself so that this farce would not have occurred. He wanted the Rashtrapati Bhavan to be converted into a hospital not because that would have been very functional but because that would have given birth to many more dreams and prevented many of the freedom fighters from turning into rulers in the imperial mould. The lament is not that we have not achieved anything but that we could have done much better if we had stayed with the dream of the national movement which has now evaporated from the national consciousness. So Sixty years down the road we are still waiting for that new dawn in the midst of 9% growth. Today Mukesh would have to sing, `Who Subaha Abhi to Nahin Ayegi’.
nuramarku@gmail.com.

The song by Mukesh from the 1958 movie, `Phir Subaha Hogi”: Woh Subaha Kabhi to Ayegi
Hindi Song
Woh Subaha Kabhi to Ayegi
In kali sadiyon ke sar se
Jab rat ka anchal dhalke ga
Jab dukh ke badal pighlenge
Jab subaha ka sagar chalkega
Jab ambar jhum ke nachega
Jab dharti nagme gayegi
Woh Subaha Kabhi to Ayegi

Woh Subaha Kabhi to Ayegi
Jis subaha ki khatir yug yug se
hum sab mar mar ke jite aiyen hain
Jis subaha ki amrit bundon ki khatir
hum zahar ke pyale pite hain
In bhuki pyasi ruhon par ek din to karam farmeyga
Woh Subaha Kabhi to Ayegi

Woh Subaha Kabhi to Ayegi
Mana ki abhi tere mere armano ki kimat kuch bhi nahin
Miti ka bhi kuch mol magar insano ki kimat kuch bhi nahin
Insano ki izzat jab jhute sikkon me na toli jayegi
Woh Subaha Kabhi to Ayegi

English Translation
That morning will come some time
When from the head of these black centuries
The scarf of night would slip away
When the clouds of sorrow will melt
When the ocean of morning would brim over
When the sky would dance with joy
When the Earth would sing songs
That morning will come some time

That morning will come some time
That morning for whose sake from eons
we all have been living by dying a thousand deaths
For the sake of the drops of elixir of that morning
we drink the cup of poison
One day fate will bless these thirsty and hungry souls
That morning will come some time

That morning will come some time
Agreed that at present the value of our dreams is nothing
Even earth has some value but human beings have none
When people’s dignity will not be weighed with false coins
That morning will come some time

Autonomy of Institutions of Higher Learning and Excellence

2006-07-15T19:56:00.000+05:30

Autonomy of Institutions of Higher Learning and Excellence
Arun Kumar
Mainstream July 15, 2006. Volume XLIV No 30.
The Governing Council of AIIMS has recommended the dismissal of the Director. That the Director had fallen out of favour with the Health Minister who is also the President of the Governing Council has been clear and it was on the cards that sooner or later the Minister would try to ease him out. Yet, the Director continued with his opposition to the Minister for many months during the Anti-Reservation stir in that Institution. Unlike, most other Directors and Vice Chancellors of our institutions of higher learning who chose to keep quite so as not to displease the political bosses, the AIIMS Director continued his opposition. This episode illustrates many things that are wrong with our management of our institutions of higher learning and why autonomy is essential if we are to have world class institutions.
Why is AIIMS considered to be a good institution not just in India but internationally? Because it has maintained high standards of teaching and medical practice. This has been possible because of the faculty and the huge amount of resources provided by the state. While the latter is important, in itself that is not enough since without highly qualified people, the money would have simply been wasted. How could the Institute recruit the best in most of the fields? Because, it could go for the best without having to adopt any other criterion or satisfy the whims of the political bosses. Many insiders, in recent years, have been complaining of growing political interference over the last 20 years and the decline in quality of the faculty of AIIMS but the situation was not out of hand. The problem is being compounded by the departure of some of the faculty given the inducement of high salaries in the new private sector hospitals that have come up. Some of these people have felt that if dignity cannot be maintained due to the growing interference, we may as well go and earn money.
The autonomy of an institution of higher learning is closely linked to its quality. Pressures from outside are to accommodate someone who on their own may not make it to a post or to promote someone out of turn. Such people, even if competent, when appointed lack in self-confidence since they know that they made it due to considerations other than their merit. They feel beholden to those who helped them and are willing to grant them favours when asked for. They use this source further to advance their careers and others feel resentful of this. The atmosphere of the institution deteriorates as the number of such people increases.
Others in the institution also get drawn into such a nexus to gain undue advantages. Soon political groupings emerge with different faculty members allied to different factions. This is not to argue against political affiliations of faculty members. Each faculty member has the right to have her/his political beliefs but these should not interfere in the working of the institutions. Unfortunately, that is happening all too often.
With Congress in power those with affiliation with the party got plum positions. When BJP came to power many saffronites got appointed. Now again with UPA in power, it is the turn of Congressmen and Marxists to get to power. Further, it is the favourites of individual Prime Ministers and Ministers who get to head institutions. Some of them are capable and good but the moment they are selected because of closeness to those in power, the dynamics changes. Some may even resist political interference but that is hardly the rule.
The Planning Commission has the nominees of various groups. Can they independently advise the government? The NCERT has had to cope with political interference. History is written by the victors so it is repeatedly rewritten. There was an impatience to replace the directors, etc. as soon as one came to power. Not even the nicety of waiting for a retirement in a short time and then appointing one’s favourite. Boards of ICSSR, Institute of Advanced Study, National Book Trust, etc, had to be replaced and packed with fellow travelers. Earlier, a few independent minded people used to also get appointed to these bodies but now one has to be a fellow traveler. Autonomy is unthinkable and the institutions are sinking.
What is this autonomy about? Commitment to the Institution, to one’s professional work and above all to society. Individuals who are autonomous will give unmotivated advice based on their best judgment. They will stand up to the powers that be and tell them when they are wrong. Others will tend to be proper, see which way the wind is blowing and change their direction. That is the case with most Directors and Vice Chancellors who have not spoken up on an issue of vital importance to their institutions. Is that what is expected of an intellectual? They are supposed to give a lead to society but they are failing in their responsibility when they keep quite. Because most of the top people are appointed on political and personal considerations and not academic, how can they take an independent stand?
The issue is not whether one agrees or disagrees with reservation for OBCs. The issue is of a debate on such a crucial issue. It is not important that the AIIMS Director did not believe in reservations and helped the agitation against reservations. That was his opinion and he stood by it like an academic is expected to. It is far fetched to compare him with Galileo who stood against the Church but progress was made because of his independence of thought. Till the time reservations for OBCs is not a national policy any one can oppose it. Once it becomes policy, the Director is duty bound to implement it. Just like today every VC has to implement the reservation for the SC/ST no matter what their personal opinion may be about such reservations. If they do not implement it, they can be thrown out and prosecuted. They are violating a law and even autonomy does not allow that.
The Minister is interfering with the autonomy of AIIMS and irrevocably damaging it. Earlier there was the spat between the Directors of IIMs and the Ministers. The Boards of Governors were used for disciplining the Directors. What is clear is that even the Board of Governors and Executive Councils of institutions should consist of independent people and not politicians and bureaucrats otherwise autonomy would be eroded and the institutions would decline. If the politicians had the national interest in mind, the problem would not have arisen so one can only make a plea to them to not misuse their power in the wider interest of society. It needs to be appreciated that autonomy enables dissent and that enables progress.

Make Reservations Effective to Eliminate Them

2006-06-10T18:11:00.000+05:30

Make Reservations Effective to Eliminate Them
Arun Kumar
CESP/SSS, JNU, N Delhi 110067.
Mainstream June 10, 2006. Vol. XLIV No 25.Pp. 5 –11.

The government has announced that the Mandal Phase II is on, come what may. It has been called a commitment to the nation. The anti-reservation agitations are continuing. A confrontation is building up which seems to have no solution. The issues are complex and the various parties in the conflict – political parties, students, professionals and intellectuals - have taken partisan positions so that the situation of conflict is likely to prolong and it would become one more festering sore for the nation. Often the government adopts a delaying tactic to tire out people and this may also happen now that the agitating students give up but it creates long term issues of loss of credibility and growing alienation.
The anti reservation protestors have down played the issue of equity and focused on merit. In spite of the limited perspective adopted by the students, they are doing those who have favoured reservations a service by forcing them to reexamine and reassess the issues involved so that the schemes in operation can be made more effective. While this may or may not alter the elitist consciousness of the agitating students, a bigger benefit would be the change in those who have been in favour of the scheme in a formalistic sense; who in a sense have led to the discrediting of reservations.
When the reservations were introduced in the country, it was hoped, perhaps naively but perhaps in the spirit of nation building that this would help eliminate caste and the associated disparities and that in a short time span, reservations would not be required and could be eliminated. None of this has happened and reservation has become a permanent feature of our existence. Who is to blame for the failure? The indefinite extension of reservations means that it has not been successful. However, it has had partial success to the extent that the number of the deprived in all categories of education and jobs has gone up. The emergence of the creamy layer amongst the Dalits is a visible sign of its partial success.
Why has the problem cropped up again? Have some people become more deprived recently and if so, who are they? Are there no other ways to compensate for the deprivation of these people than reservation? Will not some other form of affirmative action do? Of course, there are many political aspects that underlie the actions of the various actors in today’s confrontation but here the attempt is to not focus on them except tangentially. Most people agree that on grounds of equity affirmative action should be there but what and for whom are the questions people do not agree on. Most people agree that reservations should end at some point of time but when? There are large disagreements on these issues.
Who are the deprived?
The backward castes have been demanding reservations, especially after the Mandal Commission Report but have not been considered to be as deprived as the Dalits were. Deprivation is a continuum from the most backward to the most privileged. The question is up to what point special privileges need to be created to compensate the under-privileged? At the time of independence, it was clear that the line should be drawn at what are today’s Dalits and no more. The others who today are demanding reservations were not considered backward enough to justify being granted reservations.
In reality, India as a whole was a backward and under-privileged nation in 1947. Today, at $600 per capita and in terms of most social indicators it is still one of the most underdeveloped nations in the world. At the turn of the century, barely 2% of the population was students and only 11% of the population was literate. There was hardly any higher education in the country – whether for the upper or the lower castes. In brief, a majority, including many belonging to the upper castes were under privileged in the educational sense. Death rate was high for all groups because of the poor social conditions. The per capita income was low for all groups. All groups were deprived of political power by the British, except those who collaborated but then they enjoyed only derived power not because of their being a part of an elite caste group. Hence, in 1947 almost all of India was under-privileged economically and socially but the Dalits were the most under privileged since they were also historically socially deprived and were exploited by all the groups above them in social ranking. These are broad strokes and there are various nuances that need to be taken into account for analysis.
It was a social contract of the national movement that all groups would be brought up and those who were at the bottom would be specially provided an opportunity to come up by assuring them reservations. They were given quotas in the legislatures, public sector jobs and educational institutions. It was realized that there was a possibility of ghettoization in this but that was considered a lesser evil since a historical wrong needed to be corrected. It was hoped that as opportunities open out, discrimination would also decline. As stated above, there was limited success.
In brief, data indicate that at the time of independence, all sections were deprived in most senses. After independence great strides have been made in literacy, health, incomes, etc. Thus, for most sections deprivation has declined. What is true is that disparities have increased and in that sense deprivation continues. Given that poverty persists, absolute deprivation also continues for some. For reservations to be extended, data need to be collected to show what has happened to deprivation amongst the backward castes? Has it increased compared to what it was at the time of independence. Scattered evidence suggests that many of the backward castes have done well.
Working of the Reservations
There are several reasons for the limited success of reservations. First, the national spirit could not be sustained beyond the initial years and the task of nation building was replaced by working for narrow sectarian interests. The notion of sacrificing for the task of nation building has been replaced by working for one’s narrow self-interest. Second, the incorrect development strategy adopted by the Indian elite since independence based on the top down approach in their own narrow self interest. This meant that the poor were marginal and the idea of equity (on which the notion of reservation was based) in society weakened.
Third, the small creamy layer of the Dalits was coopted in the elite ruling class. They did not challenge the development strategy or the marginalization of their own people. They have not worked for the change of the consciousness of the country in favour of democratization. Fourth, there was the massive failure of the state and its incapacity to deliver due to growing and rampant corruption. Consequently, high quality education is not available to all and adequate number of jobs have not been created so that there is a fight over the few spoils. Fifth, the belief in the various emerging politically powerful groups that the secular state cannot deliver so they have to grab privileges through capturing state power by any means.
The striking feature of all this is the role of the creamy layer. Their cooption into the ruling groups and inability to lead democratic movements which could change social consciousness and help all their own people to come up. At times, it appears that they have a vested interest in the continuation of reservations and an indifference to the others of their own groups. In a sense, they have acted no different than the other elite groups. Their large numbers in the parliament and the legislatures did not mean greater force for democratization which could have benefited all the under privileged in the continuum. Partly, this is political and partly it comes out of an insecurity.
In general, when any incompetent person (of any caste) moves up due to privileges, like, money or political power or family connections, they are insecure and defensive. In India, we are still feudal and this characterizes our political, business, professional and academic groups. Their relatives move up no matter what their capabilities. Unfortunately, most of those who come up through reservation have also adopted this approach. Consequently, they are also less confident and insecure. Rather than developing a broader perspective they often display a narrow defensive mould. The decline of the wider social consciousness all around enabled them also to justify their own narrowing of perspectives. The truly under privileged have lost out.
In brief, the blame for the lack of success of reservations is not only on the upper caste elite but also on the creamy layer of the Dalits. Reservations based on equity and social justice requires that horizontal equity be respected. Since the creamy layer has moved up and is perhaps better off than many in the upper castes, they should volunteer to be excluded from reservations. Those who today distrust reservations would then see the merit of going for vertical equity and positive discrimination for the poor.
Market and Merit
Today, with the market philosophy ruling, where is the question of sacrifice by any one. The dominant ideology has changed to `me for myself’. This is not only true for the business classes but also the political classes. Leaders from the national movement, led by Gandhi, set an example of sacrifice which everyone else followed. Nation building rather than me first was the motto of those in the national movement. Today, in Parliament or in the parties where are the symbols of sacrifice? Designer clothes are replacing Khadi, jet setting to come to parliament has replaced walking down to parliament and making money hand over fist through corruption has become the norm for successful politicians. Even those who wear Khadi in Parliament come out in fancy suits in the evening to socialize in five star hotels. Our leaders break most rules in the law book and then expect that the students will be idealistic and sacrifice. What examples are we setting that we ask the students to be different?
One may say these people have no ideological commitments so why expect them to be any different? This is itself a sad commentary on our politics that now there is little commitment to wider goals. However, there is a section of our society which has attained its status due to intellectual commitment - the academics. Even amongst them those professing socialist philosophy are busy making money rather than advancing the cause of the deprived. They take on projects and consultancies rather than do genuine research and teaching – killing the democratic spirit of the Universities and Colleges. They are the most immediate examples to students of what success is. We need to ask ourselves, when is the last time anyone of us in the elite groups agreed to sacrifice even a small privilege? Even those in the creamy layer are refusing to give up their privilege.
Why expect the students or anyone else to sacrifice for a very imperfect reservation? It is clear that the reservation policy does call on some students to sacrifice – those in the middle. Fifty per cent of the seats will remain for the general category students so the very best will have no problem of admissions. Some good students (possibly still at the top or in the middle) will be replaced by the less meritorious who enter through reservations.
If the state had been successful in delivering high quality education and full employment, would the problem have arisen? Everyone would have been meritorious and would have had jobs. The situation has become more desperate since the market based policies have led to decline in employment generation and led to the deterioration of public institutions of higher learning. Today, the Communist governments are openly seeking foreign capital which has little to do with the poor and can only worsen their situation through reduction in employment. The Lohiaite CMs are seeking the blessings of the big industrialists and making them the members of their development boards. Would such people serve the interest of the deprived? Media is projecting the image of the successful as those with pots of money. Then we ask the students to sacrifice. Can the policy makers and the elite begin to look beyond their noses?
The failure of the state and of the legislators from the deprived sections has been that they have not been able to ensure either good quality education or jobs. Have the latter worked systematically for Right to Employment or full literary? They have not protested the mockery of education through Sarva Shiksh Abhiyan, paying teachers Rs. 750 per month (below poverty level income). Who would be genuinely prepared to teach at that income? Surveys reveal that our children from deprived areas are not able to acquire the basic skills needed. They have not protested the growing corruption which undermines all development. They have not only not launched a campaign against corruption but have indulged in it. Elite sections not doing any of this is understandable but why the creamy layer created by the reservations? Clearly, the latter is coopted and hardly interested in social reform.
Different Forms of Reservations
This is not to deny that in our society we do not have reservations by various means. When we set up full paying courses, we are reserving by money. When the son of an industrialist inherits the management of the company that is also reservation. We are not going by talent or merit in these instances. This draws little protest since all of us have accepted private property as a rule and with market based policies dominating we have accepted that those with money have special privileges.
The question is how is merit defined? By the market. Yes, indigenous people have tremendous knowledge and corresponding skills but these are not valued in the market hence not counted as merit in the market. Skills are valued in the market and called merit but these are not necessarily based on social needs. Selling oil in ITC or toiletries in Hind Lever is paid far more so considered more desirable than being a teacher or a doctor in the villages. So the former is supposed to be more skilled than the latter so that the good students go for that. Why are the best students going for IIT or IIM? Because this is a passport to such high paying jobs or for going abroad again at high salaries. Is talent not being wasted in the process? What good is such merit if talent is only going to be wasted as far as society is concerned. It is equally true that in today’s market milieu, the students who come through reservations will adopt the same strategy as the general category students. They will not further the indigenous knowledge or serve in the villages and therefore also not serve the social purpose – they want a passport to a good life; a slice of the cake.
There is a legitimate argument for merit and skills in a complex and rapidly changing world. The anti-reservationists argument for merit is all too easily brushed aside by the pro resevationists. Many jobs are highly skilled all over the world and those lacking adequate skills cannot cope with them. Can it be denied that doctors have to be highly skilled or that space scientists or teachers have to be of the highest quality for new knowledge to be generated? Otherwise, we would further lag behind the rest of the world. Knowledge is built up, layer upon layer. Weaknesses in earlier stages result in continuing weakness. It is also true that skills and merit are not inherent or genetically determined but often are acquired due to opportunities, training and practice and in this the upper castes have clearly had a huge advantage.
Mrs. Gandhi’s political skills were honed by being in close proximity to power at the top. Many children of businessmen pick up skills of business through contact and work experience. This is denied to even the very best minds of the under privileged (including those from the upper castes). The elite classes, including the creamy layer from the deprived sections also win in the current system. The latter have a disproportionate amount of opportunity since they have limited competition - a fraction of the community has the entire community’s quota. Often they have even more opportunities than the upper caste students.
Are those against merit going to argue that they would give up merit in selection amongst those to be taken under the reservation quota? Will those taken under quota be selected by lottery, irrespective of their ranking because merit does not matter? Why is there pass or fail or grades or marks in exams? They represent different level of skills amongst the students. It is another matter that the exam system is imperfect and there are different kinds of knowledge and skills that the exam system does not represent. Are we asking for a radical reform of the system itself, including the examination system? But, as long as we live by the system, there is a difference in the level of skills amongst different students and those with the best skills need to be selected for jobs requiring high degree of skill. If merit is defined by the markets, giving up merit also means giving up the market.
In brief, merit and skills are important in many jobs relating to knowledge generation and perhaps not in selling oil or toiletries. Some of these skills can be acquired through training and opportunity which the poor do not get. To that extent reservations in certain course (like, management or administration) provide opportunities but the argument would not hold where high level of skills are required (like in medicine and R&D). Merit and skill should be delinked from salaries and there is a need for a national incomes policy to channel talent to social purposes and not into selling tobacco or moving funds around.
Our Formalistic Politics
Today, our political processes throw up formalistic solutions for short term gains. Where are the tall leaders who can stand up against this trend and work for building a different kind of politics? Today, no political party can stand up and say yes we made mistakes in the past and we will not give in to the vote bank politics. If reservation for the backward castes were a genuine move perhaps no one would have minded. What worries many is that it will be one more nail in the coffin of the task of nation building and eliminating the caste system. It would become a vested interest of some to continue to be categorized as backward. Just as today it is impossible to vote in Parliament against reservations, it will be even more difficult tomorrow to vote for its elimination. No one would even moot such a proposal.
Now there is talk of immediately expanding the number of seats for the general category students. Firstly, no one believes this is going to happen since such things have not happened in the past. Imagine the fuss when there is talk of raising the education budget to 6% of GDP or giving subsidies to the poor. Second, even if there exists the will to raise the expenditures it would still be impossible to expand higher education by 50% in a few years. One may also ask why the government has suddenly woken up to the idea of the need to expand higher education in the public sector. It has been arguing against this all the while on the plea of resources and dilution of quality, etc. Now it is waiving a magic wand and saying all would be well.
Expansion of higher education is a structural matter and not a matter of fiat. It is the quality that matters and not just numbers. One good lecture is better than hundred insipid lectures; actually they would put students off from learning. No wonder there is absenteeism of teachers and students from the classes. Universities and Colleges work like offices; nine to five. Today there is an acute shortage of good teachers because of the operation of the market mechanism. The salaries of College teachers do not compare favourably with those of other comparable jobs. Further they have few promotional avenues. How are we suddenly going to attract fresh talent given that with what is available, we are unable to fill vacancies in engineering and Medical colleges?
It is a chicken and egg problem. Given the status of teachers, good students do not enroll for Ph.D. except by accident. This is the situation in institutions, like, JNU. Thus, we are producing few good teachers and researchers. Hence the quality of teaching is suffering. In good institutions like the IITs or the IIMs, the students are inherently so good that the quality of teaching is more or less immaterial. Can this continue with reservations? Firstly, where are the 50% extra teachers? There are not even the teachers to fill the existing 20 – 30% vacancies. Yes, the undergraduate labs can be replicated with money but the teachers cannot be created overnight. Classrooms will get crowded and those admitted under the reserved category who would need extra help will flounder. They will be angry and insecure.
If justice is to be done to the students admitted under reservation, then much more than 50% expansion of faculty will be needed to help them. Another possibility is that teaching will be done at the expense of research so the long term standing of the institutions will decline. Finally, to attract talent, salaries of faculty will have to be at least trebled to match those in the corporate sector or to attract talent from abroad. The resources required would be a multiple of those estimated. Since none of this is likely, standards will decline and we will run down some of the better institutions and then end up creating other institutions at huge expense. Can we replicate good institutions like the IITs? With difficulty, since institutions are not just buildings and labs but also the human content and traditions.
Who amongst the backward castes would come to take the quota seats in elite institutions? Quite clearly, not the most deprived who are very poor and most of whose children drop out of school. Their families need them to work to earn and supplement family income. There are perhaps 20 million child workers. Further, a large number of these children are malnourished or they have learning deficiencies due to malnourishment of the mothers. They cannot even complete school much less go to College. Very few have the staying power to go to College and they are of course from the creamy layer. So reservation in higher education for the backward castes will be cornered by the creamy layer. Do these people need affirmative action like in JNU or reservation?
JNU Formula for Affirmative Action
There are some who talk of the success of the reservation formula in JNU. As they say, `Andhon me Kana Raja’ (the one eyed is the king amongst the blind). Yes, JNU is different and perhaps the most progressive institution of higher learning in the country. We have been giving points to those with a variety of backwardness. But if one asks how successful has it been, to be honest, not much. Most of the Dalit students are struggling in the class and suffer from social problems. We believe in formalism. Fulfill the quota and throw them in at the deep end. We hardly provide them with remedial help to overcome their handicap. Many do not come forward to take advantage of the remedial courses for fear of being labeled as weak. Mind you this is also the case with other students from backward areas not just those who are Dalits or backward. Finally, in today’s corrupt society, it is easy to get false certificates and no educational institution has the capacity to check all this. JNU experiment shows that the best of ideas do not get implemented the way they should because of inadequate commitment and belief in symbolisms.
Why has the problem arisen now?
The problem of reservation has slowly become acute since there is a growing crisis of unemployment. Out of the 9 million children joining the job market annually, hardly 2% of them will get the desired organized sector jobs paying well to enable them to afford a good life. The rest will be doomed to low paying unorganized sector jobs. The fight is over these few jobs and hence the need for reservations. The situation has been aggravated by the demonstration effect from the West and growing consumerism. Children brought up on high pressured advertising and Bollywood masala wish to live like their heroes but with little chance of fulfilling these aspirations at the low incomes most of them would be locked into for life. The failure of small business in India is high in today’s competitive world (with China breathing down the necks) so that there is not much prospect of starting own business. There are more than 3 lakh sick small scale units so that few of the poor students dare to start own businesses.
The public sector jobs are declining in numbers so that reservations in jobs has lost its meaning; the private sector does not reserve jobs. If we are to depend on the private sector alone for new jobs for all those coming into the job market, we need to have a different technology and an incomes policy. The market is not going to be an ally in this.
Further, the quality of most of our schools is rather poor specially of most government schools. Then how do students acquire skills. There is need for effective literacy and not just formalistic one. To do well in today’s world, one needs to be able to understand the current technology – even the three R’s are not enough. There is a need to have equally good quality schools for all. This is feasible if we go in for neighbourhood schools for all. But will the elite agree? Regarding higher education, they have actually been arguing against the expansion of the public institutions and suggesting privatization. They have been arguing that its rapid expansion has led to dilution of quality. For them privatization means profits and they wish to have no part of affirmative action. In Delhi, private hospitals were given cheap land on the condition that they would treat poor patients but this has not been practiced.
We have to change this mind set which is letting the public sector whither away even though it is known that the private sector would not cater to the poor. It is often argued that the government does not have the resources. Massive tax concessions are given to the well off sections so that the tax GDP ratio fell after 1990-91 and now the Receipts Budget of the Union Budget 2006-07 has confirmed this by showing that concessions worth Rs. 90,000 crores have been given to the corporate sector. Further the black economy is at least 40% of GDP and the government is losing at least Rs. 4.5 lakh crores of taxes. This is not peanuts. Allowing the black economy to flourish reflects the lack of political will and that is why we have not been able to implement good intentions in the past.
An individual in society has a social contract for life. During the British rule it was weakened but after independence it was revived and democratized. However, the ruling elite of India with its feudal mindset has weakened this social contract over time and specially after 1991. The market has led to its further dissolution. All this has let loose social tensions on a large scale and that is what our politicians are trying to exploit in a negative sense. There is a need to revive this democratic social contract to resolve our problems – employment, education, health, housing must be available to all.
Conclusion
Perhaps it was naïve to think that reservations would quickly dissolve exploitative caste divisions. It is not caste that matters but the discrimination associated with it. But did we do enough to change things? The failure of the state has been an important reason for the continuation of deprivation and poverty and the pressure for reservations. Today, we cannot ignore the argument for equity and social justice since it is still compelling. But horizontal equity requires that the creamy layer should volunteer to be excluded. The issues raised by the anti-reservationists need to be addressed if we want workable affirmative action. There is merit in arguments from both sides and it is not easy to steer a middle path since there is also lack of trust (leading to impasse) amongst different sections given that the issue is seen in narrow political terms.
We need to ask whether all the backward castes are so deprived that they need to be given reservation and nothing less? Can it be something less, like, a handicap in admission and that too to select backward castes? Would not that serve the purpose of equity much better? Has the status of some castes not improved greatly in the last 55 years? Why the admitted backwardness of the Muslims and women is not a reason to extend reservations to them also? Why not review the entire issue of reservation afresh and have a uniform well defined non-partisan policy. There should also be constitutional guarantees regarding expenditures and other such support to policy. If the government can have an FRBM for fiscal responsibility why not a social responsibility bill spelling out definite goals? We have to rise above formalistic policies and give them real content.
Today, the real problems are being ignored – right to work for all and high quality education to all, to not only give equal opportunity to all children but to make every child meritorious. The really deprived drop out of schools and do not get to higher education. Today the fight is over a small and shrinking pie – formalistic solutions are being attempted which can only worsen the situation with regard to caste consolidation. There is also need for an incomes policy which is difficult to implement at the best of times.
The argument about resource shortage has been proved to be a red herring since the government is now willing to find an additional Rs 8,000 crores which till now it said was not available. The blame for the failure of reservations has to be borne by the ruling elite including the creamy layer Dalits and the backwards whose consciousness has not broadened. Since they have been in substantial numbers in the Parliament and the legislatures for a long time they could have initiated moves for basic changes. Instead, they have chosen to be coopted into the ruling classes.
All groups now understand the political message of how to get to power in the short run; nation building is secondary. That is why the problem today is intractable. There is no doubt that there are vast numbers of under privileged in our society and they need to be helped to come up but no one is willing to sacrifice because in today’s India, with market as god, no one does, not even the creamy layer. Dramatic expansion in public sector higher education is a proposition which is unlikely to be realized – in quantity or quality terms. Some say that given the present political structures, reservations is the only way to eliminate the caste system. It is argued here that as it is structured at present, it would not do so.
In brief, because of our past failures, political compulsions of the ruling elite and narrowness of thought, today we cannot escape the argument for equity even if reservations have not served their purpose but we can be sure that if horizontal equity is not respected we can only aggravate the situation further by consolidating caste in its negative sense.
nuramarku@gmail.com.

Exiting Through In-Gate, Initiative and Efficiency

2006-05-15T18:12:00.000+05:30

Exiting through In-gate, Initiative and Efficiency
Arun Kumar
The Economic Times, May 15, 2006.
http://www1.economictimes.indiatimes.com/articlelist/1836347985.cms
On regular visits to a private Hospital in Delhi three years back I observed that a majority exited the hospital through the in gate rather than the adjoining out gate. Does it matter when in India traffic (especially, police vehicles) can be seen going in the wrong direction? It reflects the mind set of the elite, who should know better. The impetus for completing the article came while driving back home during the heavy and chaotic Delhi traffic on the day Mrs. Gandhi resigned from the Parliament. There is a deep interconnection in all this.
Just like exiting through the in-gate is mundane so is the violation of the conventions by say Ms Bacchan or Ms Gandhi. Breaking of rules and conventions is now an integral aspect of the working of the Indian system. It is the underlying reason for why systems break down or quality is poor or living conditions are poor. So, water in the tap cannot be trusted, milk may have urea in it, cheques in transactions are not accepted, people avoid the police, etc. All this affects economic efficiency and the collective welfare.
On the road, stuck in crawling traffic and unnerved by frequent violations of traffic rules, the links cannot be missed. Light poles or signboards obstructing a view of traffic lights, buses standing in the middle of the road to drop off passengers and causing pile up of traffic, poorly designed new flyovers leading to jams at the beginning or the end of the flyover, unmarked potholes, etc., create the mosaic of chaos. It is not that traffic is very dense but it is the way everyone drives that everyone is stuck. Even those violating rules to get ahead take longer to reach their destination than if everyone followed the road rules.
Our rulers are in a race to get ahead, whichever way. MPs do not mind taking up jobs/work they should know better to stay away from. But is it surprising if they take dirty money for fighting elections, freebies from businessmen or money for asking questions or fixing meetings, etc. They feel they are the rulers and above the law. They believe they can change rules as and when required. Those who have recently resigned feel aggrieved and not ashamed and want to come back to power again. Any notion of shame and morality is missing. As is often said, what is the use of being in power if one cannot bend the rules – what is shame?
Our rulers have a feudal mind set and think of themselves as above the rule of law. They have got away for long with thinking of themselves as special - giving themselves huge perks to live a regal life. Leaders are not in service of the public and the executive is not `Public Servant’. They, in cahoots with the vested interests, indulge in misuse of their power to amass wealth through corruption. They set the standards that others follow.
The other elite sections in cahoots with the politicians and the executive are businessmen, professionals, entertainers, and so on. The PM and the Chief Justice have now also pointed fingers at the judiciary. In other words, large numbers in the elite circles in India routinely break the law. So exiting through the in-gate is natural.
When rules are broken with impunity, systems become run-down and inefficiency follows. Is there a trade off between the efficiency of the system and the creativity of the individual. Is it the case that systems kill individual initiative and lead to loss of creativity?
In India, initiative often means flirting with rules and bending them as much as possible. Farm houses in Delhi and educational institutions in Maharashtra are only a case in point. It is said in the bureaucracy, the file work of those who are the most corrupt is impeccable. The MCD engineers checking the violation of building bylaws, after taking bribes also note the violation in the files and send notices but do not act thereafter. The file is complete and sleeping.
Successful businessmen are supposed to have the highest degree of initiative. Most of them bend as many rules as they can – environmental rules, labour laws, tax laws, etc. So the black economy is flourishing and large - at least 40% of GDP. Great, our GDP is larger than reported and we are better off than the official statistics reveal? So, individual initiative seems to work even if it propagates illegality.
Certainly, those who are rich have higher incomes than they declare. But, 93% of the workforce is in the unorganized sector and certainly has little part of the black economy. Many in the middle class hardly earn any black incomes. Thus, a small elite section, a mere 3%, has a substantial part of the black economy.
Much of the black economy is like digging holes and filling holes, where there is activity without productivity. Roads are repeatedly repaired. To check illegality, there is a bloated bureaucracy – the inspector raj. Laws have become complex and a battery of lawyers and chartered accountants are employed to creatively interpret them. Consequently the overall economic potential of the economy is not achieved - the level of output is lower and the rate of growth is less than it could be (10%). We collectively make ourselves inefficient just like stalled traffic.
Can laws ever be perfect? If the spirit is unwilling, human ingenuity can always circumvent any law. The government that governs the least should mean that it needs to intervene the least because people automatically follow rules and the regulatory apparatus required is the least. If a few rules are broken, it would not matter but when each one breaches some rules, it becomes systemic and we stall. More thieves and therefore more police would lead to employment but little productivity. If the black economy had not existed, each one of us would be many times richer than we are; even the rich.
Initiative in breaking rules slows everyone down including those who break rules, like in Delhi traffic or in the Indian Parliament which seems to be perpetually stalled because skeletons are falling out of the rotting doors of the closets at regular intervals.
CESP, SSS, JNU, N Delhi 110067.
nuramarku@gmail.com.

Growth Scenario: Is the Common Man in the Picture?

2005-12-25T19:25:00.000+05:30

Growth Scenario: Is the Common Man in the Picture?
Arun Kumar
Introduction
The Economic Survey notes `the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy from around 6 per cent to about 7 per cent per year. Developments in the current year provide supportive evidence.’ (p. 14). A graph is produced alongside on p. 15 which is used as supportive evidence. How far is this a valid claim? The recent rise in the Saving Investment rate is seen as a cause of optimism for achieving higher growth rates.
Growth at any cost has become acceptable to many under the influence of conservative economists who believe that nothing much can be or should be done about distribution. They express faith in trickle down. Government economists also express faith in this view. Such arguments are based on a mechanical view of Man as a sophisticated machine devoid of social linkages and consequences. Government need not worry about them, they will take care of themselves.
Further, the public has got used to tall claims from the government, like, during the `India Shining Campaign’ of the previous government, even while it finds its lot deteriorating. It needs to be asked, how far has this growth benefited the poor and the common person in the country? The continuing problems of the farmers, youth looking for employment and those in the unorganized sectors suggests that all is not well.
Section I of this paper presents the government’s claims of positive features of the economy in 2004-05 and then critically examines its case for a transition to a higher growth path in Section II. Implications of the current growth path for employment generation and the marginalized sections of the people are discussed in Section III. Section IV analyses the nature of the growth path and the growth impulses in the economy. It also looks at the philosophical underpinnings and the deeper implications of the growth path for the common man. The rising Investment and Savings rate are analysed in Section V. The final section presents the conclusions.
I. The Positive Features of the Economy in 2004-05
The Economic Survey 2004-05 argues that the economy performed well (expected growth rate of 6.9%) in spite of the drought experienced last year. The Index of Agricultural production is expected to show a marginal decline over 2003-04 (179.2 as compared to 180.1). However, data on Rabi crops indicates that the fall may be greater than this. The index of wholesale prices is expected to grow by 5.0% instead of 4.6 % last year in spite of the drought and the raise in petroleum goods prices which had its impact on internal prices. Rate of Industrial growth has continued to rise to reach 7.8% while the services sector grew at 8.9%. India, therefore, presents the image of one of the fastest growing economies in the world with moderate rates of inflation.
This picture looks even better when the fact of higher Savings and Investment rates is factored into the analysis. The Investment (Graph 1) and Savings rates declined after 1999-00 and started to pick up in 2002-03 and have gone up to reach a new high last year. This suggests that with a constant capital output ratio, the rate of growth can pick up.
On the external front, exports have continued to rise strongly (25.6% in $ terms) and the foreign exchange reserves rose by a further 22.7% in $ terms to reach the record figure of $128.9 billion on February 4, 2005. This would cover 16 months of imports and places the economy in a more stable situation than earlier. These resources provide the base for a faster expansion of the economy without the worry of higher inflation.
The other critical resource for a faster expansion of the economy is the availability of food. The stocks have declined sharply in the last three years but they remain at comfortable level and no shortage of food is anticipated. In other words, neither foreign exchange nor food would be a constraint to faster growth of the economy. While infrastructure could be a constraint to the faster growth, government has been claiming that the economy has transited to a higher growth path. How far is this correct?
II. Higher Growth Path or a Downturn
The Economic Survey presents a graph (p. 15) that gives the rate of growth of a year as the average in the preceding 10 years. Graph 2 presents this along with the actual annual growth rate and the decadal average growth rate for comparison. The graph of the past averages shows that the growth rates have been rising since 1980-81. However, this graph can be read in different ways. There is no dispute amongst analysts that the growth rate went up in the 1980s as compared to the 1970s. The decadal average growth rate shows that the averages for the 1980s and 1990s are certainly higher than for the 1960s and 1970s. However, they are not very different from each other. So where does the argument for the higher growth rate come from?
Even the graph in the Economic Survey suggests that there is a stagnant rate of growth in the last 10 years. Further, it displays a cyclical pattern and one cannot project from that to argue that the rate of growth will now rise. Finally, it distorts the pattern of actual growth so that it is not a good way to show that there would be a higher growth in the future. For instance, in 1990-91, there was a sharp downturn but the graph shows an upturn. In fact, why take the average for the last ten years and not five years or some other number of years. Graph 3 presents for comparison the past 5 and past 10 year averages. The 5-year graph shows more fluctuation as expected and shows that the trend is falling in the recent past. From that can one conclude that now the rate of growth of the economy will fall, contrary to the expectation in the Economic Survey. One needs to more carefully interpret the kind of graph presented in the Economic Survey.
If an economy is on a steady rate of growth at r%, the past ten year average income bears the following relationship:
(Yt)av α Yt-10.
If Y displays a cyclical pattern with a periodicity of 10 years (or a sub-multiple), the fluctuation would be eliminated. In other words, the graph crudely represents the past and that is hardly the basis to project if there is a new growth path based on some parametric changes in the economy.
Further, if the authors of the Economic Survey wish to claim that this graph is useful then they must also accept that according to them the economic up turn started 25 years back when the old policies were in operation. Then where was the need for the New Economic Policies with all their iniquitous consequences? Are they trying to make a case that if equity is a concern there was no need for the New Policies launched in 1991?
The past 10 year average Graph also shows that while the peaks are narrow the troughs are wide. This is the classic pattern of business cycles. What this suggests is that the rate of growth after reaching a peak in 2003-04 is now on its way down. The New Economic Policies by limiting the role of the government in the economy prevents the government from implementing anti-cyclical policies to give a boost to the economy (Kumar, 1996). The cyclical pattern is also a consequence of the narrowness of the base of the growth impulses of the economy (discussed below) and the rise in the size of the black economy that accentuates the tendency for deficiency of demand in the economy (Kumar, 1999).
III. The Weaknesses: The Positive Hides the Implications for the Poor
Since 1991, governments have been using the Economic Survey to paint its policies in a positive light. It therefore, tends to gloss over the negative aspects of its actions. Much of the national media, controlled by the corporate sector, also plays a supporting role. For instance, in the post budget discussion, the views of the corporate world are given predominance even though they produce a tiny fraction of the GDP. The media has been a party to spreading the `feel good’ factor. It has put out stories of Indian students getting high starting salaries abroad (up to a crore per annum) and by Indian standards high salaries in India itself. What is not pointed out in these stories is that they are only talking of a few thousand such lucky young people. A bulk of the 9 million young Indians who join the workforce annually struggle to get jobs and often will get salaries of just a few thousand rupees per month.
The fact that the economy will grow at around 6.5% while agriculture witnessed a drought itself is an indication of the growing divide between the few and the many. While close to 60% of the population, dependent on agriculture, will witness a declining per capita income, the rest of the economy employing 40% of the work force, will experience a growth rate of 9%. This picture is not undifferentiated and needs refinement.
The share of the unorganized sectors in National Income has dropped from 64.3% in 1991-92 to 58.5% in 2001-02 (Kumar, 2005). However, employment in this sector is rising as a fraction of the work force. The organized sector employs 5% of the work force (counting child labour also) but produces about 41.5% of the output. Thus the ratio of the per worker output in the organized sector compared to that in the unorganized sector would be 13.5. Since 65% of all investment is going into the organized sector, the organized sector worker is getting 35 times more capital than a worker in the unorganized sector. This underlies the wage differential between the two sectors.
Consequently, those in the organized sector of the economy (5% of the work force) will experience a rising income but not those in the unorganized non-agricultural sectors (35% of the work force) whose share in output is falling while their share in employment is rising (Kumar, 2005). Further those in the fast growing sectors of ICE, software and BPO are a minuscule fraction of the organized sector workforce and will experience even higher growth in incomes. In brief, around 3% of the households (in the organized sector and self employed) will see their average incomes rise, about 60% in agriculture will see average incomes fall and the rest will have stagnant or marginally rising average incomes.
Further, since most of the private investment is going into the already developed areas and government is cutting back capital and developmental expenditures, the backward areas are languishing and this is resulting in growing differentiation between the advanced and the backward regions. In sum, growth is leading to rising inequity which would explain the continuing distress of the farming community as reflected in the unabated suicides, the distress of the youth which is unable to find proper work, the marginalization of the unorganized sector and the backward areas of the country.
The government has delayed the passage of the Employment Guarantee Bill. Even though it is only a safety net device and in itself inadequate to take care of the problem it is necessary to at least meet the urgent needs of the really poor in society. Further, there is no overall appreciation of the causes of the problem amongst the policy makers and of the fact that a comprehensive view of the problem is necessary to boost employment generation in the country. What they do not realize is that they need to look at each of their actions to see which ones are reducing employment generation. The following makes this clear:
1. The government, in spite of build up of foreign exchange reserves that are proving to be an embarrassment is continuing to welcome FDI in areas which have been traditionally labour intensive like, retail and construction. These moves will cause a further decline in employment elasticity. This reflects a mind set in which the poor do not count and only the needs of the elite are important. The question is why should India not be protecting employment when the employment situation is reaching crisis proportions? The capital needed in the sectors that are being opened up is available within the economy. After all, total approval of FDI in 2003 was about 5,500 crore, a mere 0.9% of all investment in the economy. Even though it is small, it is also forcing Indian industry to also upgrade and use more capital intensive industry. The net effect of new technology (even though it creates some jobs) is lower employment in the organized sector and also elsewhere. Use of new technologies like telecom or computers in older industry is reducing employment in traditional industries.
2. To appease industry and specially foreign capital, the government has been trying to push through labour reforms on the plea that flexible labour markets will result in more employment. All this is resulting in is that employment is declining in the organized sectors which are using VRS, etc., to reduce their work force. If the argument was correct, why is employment generation not dynamic in agriculture where employment elasticity is now close to zero whereas there is full freedom to hire and fire since it is entirely in the unorganized sector?
3. Reduction in customs duties since 1991 is undermining not only the large-scale sector but more importantly the small scale sector and this is effecting employment generation in the country. In 1991, the customs duties were of the order of 4% of GDP and now they are down to 1.7%. In 1991, they were roughly equal to excise duties but now they are around 40%. Since internal indirect taxes feed from one good to the other, they raise prices which effects even the small-scale sector which is otherwise mostly outside the net of such taxes. Further, the benefit of cheap imports goes mostly to the large and medium sectors which are more import intensive than the small scale sectors. Cheap imports effectively means dereservation for the small-scale sector. In brief, the small-scale sector suffers both due to internal and external competition.
4. The stagnant employment generation is also linked to the narrowness of the growth. It is dependent on the well off sections (say, 3% as pointed out above). The demand from this upper crust is for imported and/or high technology goods. These have low employment elasticity.
5. Agriculture is not only starved of investment but whatever it is getting is mostly labour displacing and that is why it is generating little work. Opening up and build up of stocks has led to stagnant or declining prices while the new investment has raised costs due to the adoption of new technology. This underlies the crisis in agriculture which is resulting in low investment and little employment generation.
6. Higher budget deficit of the government and cut back in social sector expenditures is accentuating the hardship of poverty (See the Chapter on Public Finance in this volume). Public health and education which have a huge potential for employment are in a state of near collapse.
Commercialization in the social sectors (health, education, drinking water, etc.) is on the rise creating two markets one for the elite and the other for the rest and creating problems for the common man who does not have the wherewithal to pay the higher costs for these basics of life. It is leading to a collapse of public education which is effecting research and making it more narrowly focused on courses with commercial value. The focus on learning is changing to that on passing exams. This has the potential of locking the country in a low value added and low productivity production using cheap labour. The country is becoming a part of the global division of labour. The poor with low levels of skills are the residual in the process. The backward parts of the country are also at the tail end of this process. In brief, commercialization in education will strengthen accentuate differentiation.
Growth has been based on the consumerism of the well off and has overlooked normal welfare decreasing consequences, like, displacement, polluting production, growing malpractices in social sectors, etc. In other words, growth is associated with a decreased amount of welfare of the common person. Drinking water, air and food are all polluted, resulting in a decline in health and increased medical costs. The growing malpractice in the health sector is adding further to costs. The growth in the services sector because of these rising costs is in part spurious.
There are two consequences of this. First, there is a need to redefine poverty and second, economic growth rates need to be reassessed to bring them more in line with increase in the true welfare of the people. Environmental damage, loss of assets due to displacement also need to be deducted to calculate the actual rate of growth of the economy. In brief, the current data does not adequately represent the growth rate of the economy and does not measure the welfare implications for the poor.
IV. Narrowness of the Growth Impulses
Growth since 1990-91 has been accompanied by:
Growth in share of output of the a) organized sector, b) services sector and c) more developed regions and a fall in the share of a) employment in the organized sector and b) expenditure of government on development and especially in the social sectors, like, health and education.
So, a) fewer people are producing more and earning more, b) the poor who need more government support are getting less of it and c) poverty is getting concentrated in agriculture and in rural areas of the backward regions.
Thus the base of growth of the Indian economy is becoming more and more narrow. If child labour and women who are at home and wanting work are also counted then the unorganized sector is 95% of the work force and the un and under employment rates higher than the official data reveal (Kumar, 2005). Since their incomes are rising slowly or stagnant, mass demand is rising slowly.
The elite whose incomes have risen fast, accentuating disparities, can sustain high growth in demand only for a short period of time. This results in demand deficiency manifesting itself repeatedly. Prior to 1990-91, while the down turn was associated with a downturn in agriculture now that is also modified by the business cycle in non-agricultural sectors due to demand factors. The reduced role of the government lowers its capacity to boost demand when there is a downturn. The economy has to revive on its own through increases in private investments but since that is flowing into the more developed parts, the poorer areas become more marginal and more dependent on the government which is in retreat.
Growth is also narrowly based in the urban areas and in the more developed areas. Given that poverty is entrenched in the rural areas in the backward states, the higher growth does not benefit the poor. The divide is only likely to grow with this narrowly based growth. The dilution of the role of government has also affected the backward states more than the others.
The growth in black economy leads to an increase in disparity, reduces the effectiveness of expenditures by the Government and leads to failure of policy (Kumar 1999). As the Finance Minister said in his budget, `expenditures do not mean outcomes’. All this reinforces the cyclical factors.
Underlying the post 1991 policies and the growth path is a philosophical view – a faith in the efficiency of markets. Markets marginalize Man (Kumar, 2005). They cater to the purchasing power of the individual and not to her needs and wants. Markets are based on a mechanical view of Man - that of a sophisticated machine which can be switched off or on at will with no social consequences. People are seen as demand or suppliers of factors. Nothing else matters. Everything else is put under `ceteris paribus’ as of little consequence.
This view underlies the present policies. So unemployment is not important but the stock market is. Faith in the markets is also an expression of distrust of people and their ability to contribute to society for non-monetary reasons. For instance, privatization implies that the public sector cannot be run on a spirit of public purpose while the same institution can be run on the profit motive. For example, take the privatization of services in the Railways. The same people will not do a task for the railways but do it if they can earn a profit by doing it. The task is the same and the person may also be the same but the argument is that the work would only be done for a profit. Markets cater to the greed of Man and promote it and then its proponents argue that Man only works for a monetary incentive.
Health and education have traditionally been considered to be priceless for a good reason. More than monetary reward is associated with them. Teachers and doctors were given a high status in society and they were expected to show the way to society and individuals. Sacrifice was involved in it. Today, markets consider sacrifice to be foolish. In these fields, there is a move to charge what the market will bear. Commercialization is forcing the valuation of these services and they are becoming a source of high profit. Public education and health system which are still cheap have been devalued by society and the private sector is emerging rapidly making legitimate and illegitimate profit. Society is inevitably taking a narrow view of these services.
However, these services can only be valued if a narrow and mechanical view is taken about them and they are treated as other normal goods. This contradicts the very idea underlying them – of treating Man as a being. If we squeeze the patient and the student dry because the market will pay the price, what will they do tomorrow? If these services are treated as non-market and as builders of society, distinct from other goods and services, there would be a profound impact on policy.
This underlying view is also undemocratic since people do not count. It divides people and hands over the reins of control to those who control capital. Leaders are not leaders of men but of capital - those who operate on behalf of capital and do not believe in the finer aspects of human existence. This is the distinction between today’s leaders and those of an earlier generation. Market as an ideology has become so dominant that even the common man is subject to its control and unable to resist because of lack of alternative visions. They need to be created but little is being done in that direction. This, in spite of the hardships that the common man has to undergo not only in poor countries, like, India but also in the more advanced countries.
In India, it is clear that since NEP were launched, through each cycle and there have been three of them, the common man is getting more marginalized. The economic processes are complex and most do not understand the direction they are likely to take. This atomizes them and they only act in a limited framework leaving the bigger picture to Capital. The media is not helping to understand the big picture. Leaders are untrustworthy since they have repeatedly failed so who to look up to except film actors and cricketers who anyway push for the corporate sector through their life style and advertising.
V. Savings and Investment
The growing disparity, pointed to above, underlies the rise in the savings propensity. As incomes get concentrated in the hands of the few, in spite of more luxury goods consumption, since these people have a higher savings propensity, the overall savings propensity rises. This argument can also be understood in terms of the rise in the share of services sector and the decline of the agricultural sector in National income. The former has higher per capita incomes than the latter so the savings propensity is higher.
However, it may be argued that the rise in the share of the savings propensity has taken place through the Nineties so why was this phenomenon not visible earlier? The reason is that the growing black economy masks the rise through siphoning out of the savings from the economy through flight of capital. The measured savings propensity is not the true value. In the last few years, there is evidence of a return of capital that had earlier gone out. This is one cause of the rapid build up of reserves. As flight of capital has slowed down, the Savings propensity is rising to its true value. Thus, the rise is partially statistical and will not have any real effect.
Data on the rate of Investments shows that it has also risen but not as much as the Savings propensity. After a long time, the savings propensity is now higher than the Investment rate. Graph 1 presents data on GDCF and it indicates that Investment increased more or less secularly till 1991 (to peak at 26.3%) but after that there has been a cyclical pattern with peaks in 1995-96 at 26.9% and again in 1999-00 at 25.3% and now in 2003-04 at 26.3%. Interestingly, the figure is now just what it was in 1990-91. Hence there is little scope for claiming that the economy has now transited to a new growth path of around 8%. Further, the Savings-Investment gap that has opened up will actually dampen demand and act to reduce the rate of growth.
Public sector disinvestment could also be playing a part in the return of capital. Assets are being sold cheap by the government and the private sector is trying to take advantage of it and bringing back a part of its capital stashed abroad. There is also the capital that is trying to take advantage of the higher interest rates available in India and the possibility of the strengthening of the rupee viz-a-viz the dollar.
Some may argue that public sector assets are not going cheap but at market valuation. The Ambani case points to the difficulty of valuation of a company and its assets. The two brothers have tried all means available and have not been able to agree to a price. The problem is even more complex in the case of public sector because it was not run to make a profit so current profits cannot be a criterion for valuation. When the private sector takes over a unit, it does not fulfill any of the earlier social obligations so that immediately it reduces costs and cuts losses and increases profits. Thus, valuation has to be on potential profitability. The recent adverse comments by the CAG on disinvestment are a pointer in that direction.
VI. Conclusion
`Accelerating growth is necessary but not sufficient for reaching out to the poor in the economy’ (p.18). Yet, the entire strategy of the government is to go in for more market based changes in economic policies which will mean that the poor will remain marginal. The paper shows that growth is narrowly based in a small elite in the organized sectors of the economy. Consequently, and past experience bears out, the economy is now ready for a downturn after a cyclical high. The graph produced in the Economic Survey (p. 15) that the economy has been accelerating for the last 25 years is hardly useful since it is sensitive to the number of years chosen and using a 5 year average one may come to the opposite conclusion than presented in the Survey. Further, even if it is taken at face value, it is not only not useful to project for the future since if new factors are at play, one cannot use it to project, it also shows a) that there is a stagnation of growth rates and b) if one can accept that growth has been on the upswing for 25 years, then there is no need for the iniquitous growth propelled by the New Economic Policies. One could have continued with the old policies and had growth with less of inequity.
The paper argues that the current growth in the economy is narrowly based and because of the reduced role played by the government in the economy, the economy is witnessing business cycles. This along with the return flow of capital is the cause of the rising Savings rate. It is statistical and the excess of Savings over Investment is likely to lead to a down turn. These cycles are coupled with shocks from agriculture so that there is a complex pattern of rates of growth which is not in the control of policy makers. This is resulting in distress for large sections of the population – farmers, young seeking employment, small scale sector, those in the unorganized sectors of the economy and those in the backward areas of the country.
Growth is not only not generating adequate employment, the welfare associated with it is declining so we need to reassess the growth rate itself. Through the cycles, the poor suffer the most. They are at the edge of survival and each downturn affects them adversely and cumulatively this erodes their condition. The decreased intervention by the government is resulting in lower expenditures on social sectors at a time when the common person needs more of it rather than less. The state of collapse of public education and public health has long run consequences for the country as a whole. The nation is becoming a part of an international division of labour in which it is getting more marginalized and the poor suffer its worst consequences.
References.
Government of India. National Accounts Statistics, Central Statistical Organisation, Various issues.
Government of India. 2005. Union Budget 2005-06.
Government of India, Ministry of Finance, Economic Division. 2005. Economic Survey 2004-05.
Kumar, A.1999. The Black Economy in India. New Delhi, Penguin.
-------------. 2005. Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm. Bhartiya Samajik Chintan. January - March. Vol. III, No. 4 Pp. 215-229.

Graph 1

Source: Economic Survey 2004-05

Graph 3

Source: Economic Survey 2004-05

Graph 2

Source: Economic Survey 2004-05.