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

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

The following are the youtube video links of a talk by Prof. Arun Kumar on the current financial turmoil delivered at The Ahmedabad Management Association.
Part 1 http://in.youtube.com/watch?v=KaZIyrPDwSE

Part 2 http://in.youtube.com/watch?v=ghDklXgoJb4

Part 3 http://in.youtube.com/watch?v=8AJSxAyloJ4

Part 4 http://in.youtube.com/watch?v=7qbGT7lbx64

Part 5 http://in.youtube.com/watch?v=tox-I_FEdYg

Part 6 http://in.youtube.com/watch?v=2lwP1uV859U

Part 7 http://in.youtube.com/watch?v=3PZnjQf2INY

Part 8 http://in.youtube.com/watch?v=vFcfzibYsu4

Interests of the Unemployed: A Radical Agenda for Obama

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

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

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

Growing Uncertainty: Time to Invest in Real Economy

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

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

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

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

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

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.