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)?
Tuesday, June 17, 2008
Friday, May 30, 2008
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.
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.
Tuesday, April 1, 2008
Identifying the Elite:Air Travel is not the Right Indicator
Identifying the elite: Air travel is not the right indicator
by Arun Kumar
Mrs Sonia Gandhi, inaugurating the new airport in Hyderabad, is reported to have said, “… air travel was not elitist anymore”. With airports jammed and congestion in the air leading to delays in take-off and landing, many would come to that conclusion. However, saying that more people are travelling by air now compared to five years back is not the same thing as saying that it is not elitist anymore. Who do we consider to be elite in India?
The statement reflects the view of our top leadership about society. It is particularly important since it is Mrs Sonia Gandhi who moved the Congress to its evocative slogan, “hamara hath aam admi ke sath” and it helped the party regain power in 2004. Further, it is she who forced the powerful trio of PM, FM and Dy Chairperson of the Planning Commission who believe in the pro-corporate and pro- rich policies based on the neo-liberal philosophy, to accept the NREGS and now the farm loan waiver scheme. Thus, she has been the ally of the poor in the Congress party. Yet, her statement reflects where her empathy is.
The Unorganised Sector Report based on the NSS 61st round (2004-05) shows that 77 per cent of the population lives at less than Rs 20 per day. So, most people would hardly even use trains, much less flights. Those who do use the railways mostly travel by the ordinary unreserved compartments in our trains. The overcrowding of these compartments suggests that a vast majority does not even have the money for reservation, much less AC or air travel.
The statement is similar to the argument that India is prosperous since a large number of people use cell phones. In the metropolitan centres one can spot a rickshaw-puller or a gardener flaunting a cell phone. However, this does not signify that these users are able to afford these gadgets or are better off than earlier. They may be cutting other expenditures, perhaps on essentials for the family, like on food or education of their child. High-pressured advertising and peer group pressure is known to force people into irrational choices where they sacrifice their essential expenditures for the sake of prestige, etc.
Can one say that those who consume alcohol are able to spend enough on food for the family? It is well known that many of those who drink heavily leave their families destitute. Women’s movement against drinking in Andhra Pradesh in the mid-nineties focused on this. The plight of many such families moved Gandhiji to demand prohibition.
Malnourishment among children and women is higher in India than in Sub-Saharan Africa. Food consumption per capita has declined in the country after 1991 and this has affected the nutritional status of the poor, children and women. To argue that those who do not have adequate calories are eating more of high value food does not stand scrutiny. Production of one unit of meat takes six units of foodgrains and of one unit of chicken takes two units of foodgrains. So, as the well-off sections consume more of these items, their per capita consumption of foodgrains rises even though their direct consumption may fall. Since the overall consumption per capita is falling, the brunt of this decline in the average would fall on the poor who are in no position to go for higher-value food items.
The confusion regarding who are the elite is similar to that of who are the middle class in India? By definition, those who are the middle of any ordering of the population can be called the middle class. In India, if we classify the population by their incomes, then 500 millions would be in the middle. But these are not the middle class as understood in the international context of the “consuming classes”.
According to the survey, in 2004-05, only 4 per cent of the population (numbering 44 million), at the top of the income ladder and categorised as the high income group, spent more than the princely sum of Rs 48 per person per day. This category spent an average of Rs 93 per day. Thus, in reality, even these people can hardly afford air travel in spite of the drop in air fares. It is quite likely that given these figures, less than 1 per cent of the population or about 11 million people would be middle class and would be able to use air travel. This is certainly also the elite unless for any arbitrary reason one wishes to call the top 0.1 per cent as the elite.
There is a catch: these figures are based on the reported data. The economy has a roaring black economy which now accounts for about 50 per cent of the GDP. Much consumption is based on these incomes, but surveys do not capture it. Just as the black income earners do not reveal their black incomes, they also do not reveal their consumption out of the black incomes. So, consumption in the economy is higher than revealed.
But black incomes are concentrated in the hands of, at the most, the top 3 per cent of the population and so it is they who have the extra consumption and not the poor. Actually, the rest suffer since they have to pay bribes, etc, to line the pockets of the top 3 per cent and they have to curtail their consumption. In brief, at most 3 per cent of the population would be able to afford air travel, but would this still not be the elite?
Mrs Sonia Gandhi could have said that the elite need air travel because they travel frequently. What her statement indicates is the distance between our leaders and the common man who lives at less than Rs 20 per person per day. Even Big B is reported to have said that now poverty is a thing of the past. How insulated the top is from the reality — blinded by “India shining”?
All this is not surprising given the fact that our leadership rubs shoulders with the rich in India and abroad and not with the common man. Even the party of the Dalits demands from aspirants for its election tickets a donation of a few lakhs of rupees, if not more. Lakhs are spent on birthday bashes and big diamonds sported. In Parliament, designer clothes are flaunted which perhaps cost as much as the yearly expenditure of the common person’s family. To attend Parliament, MPs are known to fly in daily in their private planes.
The top leadership rubs shoulders with this lot and socialises with them on a daily basis. Recently, for the wedding of his son, one CM gave an invitation card package estimated to cost Rs 15,000 per invitee. The top leadership is imitating the businessmen in their lavish lifestyle. As they say, a person is known by the company he keeps. They do not any more identify with the destitution of the common man.
On days when the leaders make a political show of their concern for the poor, they make speeches to them or to hired crowds looking like the poor. Or, they pay a flying visit to the villages and slums and wave at the common people since they are cut off from the masses by the security bandobast. Unlike Gandhiji, they do not go and live in their midst. Empathy with the poor is missing. The leadership does not even need it because others also do the same and there is no competition. The statement that air travel is no more elitist when hardly 1 per cent of India uses this mode of transport is bereft of an understanding of the country; a bit like the Queen supposedly saying that if they do not have bread, let them eat cake.
by Arun Kumar
Mrs Sonia Gandhi, inaugurating the new airport in Hyderabad, is reported to have said, “… air travel was not elitist anymore”. With airports jammed and congestion in the air leading to delays in take-off and landing, many would come to that conclusion. However, saying that more people are travelling by air now compared to five years back is not the same thing as saying that it is not elitist anymore. Who do we consider to be elite in India?
The statement reflects the view of our top leadership about society. It is particularly important since it is Mrs Sonia Gandhi who moved the Congress to its evocative slogan, “hamara hath aam admi ke sath” and it helped the party regain power in 2004. Further, it is she who forced the powerful trio of PM, FM and Dy Chairperson of the Planning Commission who believe in the pro-corporate and pro- rich policies based on the neo-liberal philosophy, to accept the NREGS and now the farm loan waiver scheme. Thus, she has been the ally of the poor in the Congress party. Yet, her statement reflects where her empathy is.
The Unorganised Sector Report based on the NSS 61st round (2004-05) shows that 77 per cent of the population lives at less than Rs 20 per day. So, most people would hardly even use trains, much less flights. Those who do use the railways mostly travel by the ordinary unreserved compartments in our trains. The overcrowding of these compartments suggests that a vast majority does not even have the money for reservation, much less AC or air travel.
The statement is similar to the argument that India is prosperous since a large number of people use cell phones. In the metropolitan centres one can spot a rickshaw-puller or a gardener flaunting a cell phone. However, this does not signify that these users are able to afford these gadgets or are better off than earlier. They may be cutting other expenditures, perhaps on essentials for the family, like on food or education of their child. High-pressured advertising and peer group pressure is known to force people into irrational choices where they sacrifice their essential expenditures for the sake of prestige, etc.
Can one say that those who consume alcohol are able to spend enough on food for the family? It is well known that many of those who drink heavily leave their families destitute. Women’s movement against drinking in Andhra Pradesh in the mid-nineties focused on this. The plight of many such families moved Gandhiji to demand prohibition.
Malnourishment among children and women is higher in India than in Sub-Saharan Africa. Food consumption per capita has declined in the country after 1991 and this has affected the nutritional status of the poor, children and women. To argue that those who do not have adequate calories are eating more of high value food does not stand scrutiny. Production of one unit of meat takes six units of foodgrains and of one unit of chicken takes two units of foodgrains. So, as the well-off sections consume more of these items, their per capita consumption of foodgrains rises even though their direct consumption may fall. Since the overall consumption per capita is falling, the brunt of this decline in the average would fall on the poor who are in no position to go for higher-value food items.
The confusion regarding who are the elite is similar to that of who are the middle class in India? By definition, those who are the middle of any ordering of the population can be called the middle class. In India, if we classify the population by their incomes, then 500 millions would be in the middle. But these are not the middle class as understood in the international context of the “consuming classes”.
According to the survey, in 2004-05, only 4 per cent of the population (numbering 44 million), at the top of the income ladder and categorised as the high income group, spent more than the princely sum of Rs 48 per person per day. This category spent an average of Rs 93 per day. Thus, in reality, even these people can hardly afford air travel in spite of the drop in air fares. It is quite likely that given these figures, less than 1 per cent of the population or about 11 million people would be middle class and would be able to use air travel. This is certainly also the elite unless for any arbitrary reason one wishes to call the top 0.1 per cent as the elite.
There is a catch: these figures are based on the reported data. The economy has a roaring black economy which now accounts for about 50 per cent of the GDP. Much consumption is based on these incomes, but surveys do not capture it. Just as the black income earners do not reveal their black incomes, they also do not reveal their consumption out of the black incomes. So, consumption in the economy is higher than revealed.
But black incomes are concentrated in the hands of, at the most, the top 3 per cent of the population and so it is they who have the extra consumption and not the poor. Actually, the rest suffer since they have to pay bribes, etc, to line the pockets of the top 3 per cent and they have to curtail their consumption. In brief, at most 3 per cent of the population would be able to afford air travel, but would this still not be the elite?
Mrs Sonia Gandhi could have said that the elite need air travel because they travel frequently. What her statement indicates is the distance between our leaders and the common man who lives at less than Rs 20 per person per day. Even Big B is reported to have said that now poverty is a thing of the past. How insulated the top is from the reality — blinded by “India shining”?
All this is not surprising given the fact that our leadership rubs shoulders with the rich in India and abroad and not with the common man. Even the party of the Dalits demands from aspirants for its election tickets a donation of a few lakhs of rupees, if not more. Lakhs are spent on birthday bashes and big diamonds sported. In Parliament, designer clothes are flaunted which perhaps cost as much as the yearly expenditure of the common person’s family. To attend Parliament, MPs are known to fly in daily in their private planes.
The top leadership rubs shoulders with this lot and socialises with them on a daily basis. Recently, for the wedding of his son, one CM gave an invitation card package estimated to cost Rs 15,000 per invitee. The top leadership is imitating the businessmen in their lavish lifestyle. As they say, a person is known by the company he keeps. They do not any more identify with the destitution of the common man.
On days when the leaders make a political show of their concern for the poor, they make speeches to them or to hired crowds looking like the poor. Or, they pay a flying visit to the villages and slums and wave at the common people since they are cut off from the masses by the security bandobast. Unlike Gandhiji, they do not go and live in their midst. Empathy with the poor is missing. The leadership does not even need it because others also do the same and there is no competition. The statement that air travel is no more elitist when hardly 1 per cent of India uses this mode of transport is bereft of an understanding of the country; a bit like the Queen supposedly saying that if they do not have bread, let them eat cake.
Wednesday, February 6, 2008
Impending Recession: India Unlikely to Escape its Impact
Impending recession: India unlikely to escape its impact
by Arun Kumar
www.tribuneindia.com. Feb 6, 2008.
The world economy is faced with a downturn. The issue is how deep and how quick it will be. The Prime Minister and the Finance Minister are trying to keep the flag flying and rallying the troops so that the rout is delayed. It is variously being suggested that India will not be affected by the downturn in the US economy which, according to some analysts, is already in a recession but since the data comes with a delay, it has not been officially acknowledged that the recession has started. The cuts in advertising expenditures in the US are an indication of the downturn.
The stock markets the world over are indicative of the negative mood of the investors. Adverse news is being greeted by huge declines in the indices. The US Central Bank, the Fed, has already cut interest rates twice in quick succession by a total of 1 per cent (unprecedented in recent history) signalling/acknowledging that indeed things are bad. In the US, for the first time in many years, employment is falling.
The Indian stock markets have also followed the overseas markets in the rapid fluctuations and more so because it was way beyond what the fundamentals justified. Indian industry and exports have been showing signs of slowing down. Due to rising inequality, the market in India is narrow and dependent for growth on investments and exports. Without doubt, exports will be adversely affected by the slowdown in the US.
Investments are likely to slowdown because of the industrial downturn and also because of the international trends. Both these factors will result in unutilised capacity appearing and leading to slowdown in investments and in the rate of growth. The rate of growth of the economy which rose on the back of a rise in the investment rate (from 25 per cent to 32 per cent) can show an equally dramatic fall. We may be back to a 4-5 per cent rate of growth which prevailed five years back.
The economy has been facing infrastructure bottlenecks, like in power and transportation. The food prices have been rising resulting in inflationary pressures and political problems. Oil prices have been high and even if they moderate due to the recessionary tendency, they will cause pressure on prices and profit margins. In other words, the problems already confronting the Indian economy leading to its slowdown will be aggravated by the international trends.
The optimists have been suggesting a decoupling between the US economy on the one hand and the EU and Asian economies on the other hand. It was being suggested that the growth momentum in the latter would compensate for the downturn in the US so that the world economy would still sail through with a minor slowdown. Indian analysts depending on this have been arguing that India would not be badly hurt by the slowdown in the US economy. They argue that India is not a large exporter and so the affect of slowdown would be small.
This line of argument misses the central point that now many of the markets are fairly integrated with the international markets. That has been the central point of the Structural Adjustment Package (SAP) being implemented in India since 1991. Even without full capital account convertibility, we have had elements of it. FIIs and NRI funds can come in and go out. Indian businessmen have been allowed to keep capital abroad, etc. Thus, the financial and real estate markets have been substantially integrated with the world markets. No wonder what happens abroad has immediate impact on Indian markets.
We have known that energy and food markets are integrated the world over. We have been witness to the impact of oil prices and rise in wheat prices. Thus, many of our markets are now open to influences from abroad. While it is true that we are not as open as many other economies (like Germany or Sri Lanka), we are twice as open today as we were in 1991. Hence the US economy has a much bigger impact today than earlier. Given the size of the US economy, a 1per cent reduction in its rate of growth would be bigger than a 10 per cent increase (to 20 per cent and that is unlikely) in the rate of growth of the Indian economy.
It may be argued that the cutting of the interest rates in the US and actions elsewhere will have a positive effect and prevent a downturn there. President Bush has announced a $150 billion package. He is putting purchasing power into the hands of individuals to boost demand. This would be about 1 per cent of the US GDP. However, what individuals may have lost in the sub-prime markets may be much larger and hence inadequate. Further, the decline in the stock markets and the fall in the paper wealth is also likely to far exceed this amount.
In other words, some feel that this effort may be too little, too late. There is nothing unusual in this since in business cycles it has been mostly found that in the downturn, intervention is usually too little too late so that the downturn becomes inevitable. In Japan, in the nineties when the interest rates even turned negative, the economy could not pull itself up.
The reason is that once the investors’ sentiments turn negative, there is little that the government can do to turn them around. This situation is currently aggravated by the free market philosophy where any form of government intervention is seen to be bad and, therefore, resisted till it is too late. Even when it does come, it is of the wrong variety. Governments following free market philosophy give concessions to the investors, hoping that they would invest more. However, because demand does not rise and unutilised capacity continues to rise, they invest little and the concession simply ends up raising unutilised capacity further. The medicine aggravates the disease.
Usually, in the downturn, the poor and the poorer countries are affected worse than the rich ones. For instance, the impact of the sub-prime crisis has been the greatest on the poor and the blacks in the US. The situation is being aggravated by the environmental consequences of the development path being followed in the recent past. With environmental costs of growth rising in a recession, the poor will suffer even more.
In India, where large infrastructure projects had been planned and companies were rushing to raise capital from the booming stock markets, there would be over-capitalisation and consequent losses. Indian companies have also been rushing to acquire expensive overseas assets. Such companies are likely to suffer substantial losses.
For India, the negatives seem to far outweigh any positives. Further, the impending slowdown/recession/depression in the world economy is likely to be quite different than the earlier ones since it is being driven by substantial unresolved problems in the financial sectors. No one, not even the largest actor on the scene, the Fed, understands what is going on so that correctives are hard to devise. Once the economy starts going downhill, many actions that would have been normal in a rising economy, like acquisitions through leveraging, investments in risky instruments, turn out to be mistakes. The various mistakes cumulatively amount to huge mistakes. Indian financial markets, substantially integrated into the world markets, are unlikely to be able to escape the impending crisis.
www.tribuneindia.com. Feb 6, 2008.
The world economy is faced with a downturn. The issue is how deep and how quick it will be. The Prime Minister and the Finance Minister are trying to keep the flag flying and rallying the troops so that the rout is delayed. It is variously being suggested that India will not be affected by the downturn in the US economy which, according to some analysts, is already in a recession but since the data comes with a delay, it has not been officially acknowledged that the recession has started. The cuts in advertising expenditures in the US are an indication of the downturn.
The stock markets the world over are indicative of the negative mood of the investors. Adverse news is being greeted by huge declines in the indices. The US Central Bank, the Fed, has already cut interest rates twice in quick succession by a total of 1 per cent (unprecedented in recent history) signalling/acknowledging that indeed things are bad. In the US, for the first time in many years, employment is falling.
The Indian stock markets have also followed the overseas markets in the rapid fluctuations and more so because it was way beyond what the fundamentals justified. Indian industry and exports have been showing signs of slowing down. Due to rising inequality, the market in India is narrow and dependent for growth on investments and exports. Without doubt, exports will be adversely affected by the slowdown in the US.
Investments are likely to slowdown because of the industrial downturn and also because of the international trends. Both these factors will result in unutilised capacity appearing and leading to slowdown in investments and in the rate of growth. The rate of growth of the economy which rose on the back of a rise in the investment rate (from 25 per cent to 32 per cent) can show an equally dramatic fall. We may be back to a 4-5 per cent rate of growth which prevailed five years back.
The economy has been facing infrastructure bottlenecks, like in power and transportation. The food prices have been rising resulting in inflationary pressures and political problems. Oil prices have been high and even if they moderate due to the recessionary tendency, they will cause pressure on prices and profit margins. In other words, the problems already confronting the Indian economy leading to its slowdown will be aggravated by the international trends.
The optimists have been suggesting a decoupling between the US economy on the one hand and the EU and Asian economies on the other hand. It was being suggested that the growth momentum in the latter would compensate for the downturn in the US so that the world economy would still sail through with a minor slowdown. Indian analysts depending on this have been arguing that India would not be badly hurt by the slowdown in the US economy. They argue that India is not a large exporter and so the affect of slowdown would be small.
This line of argument misses the central point that now many of the markets are fairly integrated with the international markets. That has been the central point of the Structural Adjustment Package (SAP) being implemented in India since 1991. Even without full capital account convertibility, we have had elements of it. FIIs and NRI funds can come in and go out. Indian businessmen have been allowed to keep capital abroad, etc. Thus, the financial and real estate markets have been substantially integrated with the world markets. No wonder what happens abroad has immediate impact on Indian markets.
We have known that energy and food markets are integrated the world over. We have been witness to the impact of oil prices and rise in wheat prices. Thus, many of our markets are now open to influences from abroad. While it is true that we are not as open as many other economies (like Germany or Sri Lanka), we are twice as open today as we were in 1991. Hence the US economy has a much bigger impact today than earlier. Given the size of the US economy, a 1per cent reduction in its rate of growth would be bigger than a 10 per cent increase (to 20 per cent and that is unlikely) in the rate of growth of the Indian economy.
It may be argued that the cutting of the interest rates in the US and actions elsewhere will have a positive effect and prevent a downturn there. President Bush has announced a $150 billion package. He is putting purchasing power into the hands of individuals to boost demand. This would be about 1 per cent of the US GDP. However, what individuals may have lost in the sub-prime markets may be much larger and hence inadequate. Further, the decline in the stock markets and the fall in the paper wealth is also likely to far exceed this amount.
In other words, some feel that this effort may be too little, too late. There is nothing unusual in this since in business cycles it has been mostly found that in the downturn, intervention is usually too little too late so that the downturn becomes inevitable. In Japan, in the nineties when the interest rates even turned negative, the economy could not pull itself up.
The reason is that once the investors’ sentiments turn negative, there is little that the government can do to turn them around. This situation is currently aggravated by the free market philosophy where any form of government intervention is seen to be bad and, therefore, resisted till it is too late. Even when it does come, it is of the wrong variety. Governments following free market philosophy give concessions to the investors, hoping that they would invest more. However, because demand does not rise and unutilised capacity continues to rise, they invest little and the concession simply ends up raising unutilised capacity further. The medicine aggravates the disease.
Usually, in the downturn, the poor and the poorer countries are affected worse than the rich ones. For instance, the impact of the sub-prime crisis has been the greatest on the poor and the blacks in the US. The situation is being aggravated by the environmental consequences of the development path being followed in the recent past. With environmental costs of growth rising in a recession, the poor will suffer even more.
In India, where large infrastructure projects had been planned and companies were rushing to raise capital from the booming stock markets, there would be over-capitalisation and consequent losses. Indian companies have also been rushing to acquire expensive overseas assets. Such companies are likely to suffer substantial losses.
For India, the negatives seem to far outweigh any positives. Further, the impending slowdown/recession/depression in the world economy is likely to be quite different than the earlier ones since it is being driven by substantial unresolved problems in the financial sectors. No one, not even the largest actor on the scene, the Fed, understands what is going on so that correctives are hard to devise. Once the economy starts going downhill, many actions that would have been normal in a rising economy, like acquisitions through leveraging, investments in risky instruments, turn out to be mistakes. The various mistakes cumulatively amount to huge mistakes. Indian financial markets, substantially integrated into the world markets, are unlikely to be able to escape the impending crisis.
Impending Recession: India Unlikely to Escape its Impact
Impending recession: India unlikely to escape its impact
by Arun Kumar
www.tribuneindia.com. Feb 6, 2008.
The world economy is faced with a downturn. The issue is how deep and how quick it will be. The Prime Minister and the Finance Minister are trying to keep the flag flying and rallying the troops so that the rout is delayed. It is variously being suggested that India will not be affected by the downturn in the US economy which, according to some analysts, is already in a recession but since the data comes with a delay, it has not been officially acknowledged that the recession has started. The cuts in advertising expenditures in the US are an indication of the downturn.
The stock markets the world over are indicative of the negative mood of the investors. Adverse news is being greeted by huge declines in the indices. The US Central Bank, the Fed, has already cut interest rates twice in quick succession by a total of 1 per cent (unprecedented in recent history) signalling/acknowledging that indeed things are bad. In the US, for the first time in many years, employment is falling.
The Indian stock markets have also followed the overseas markets in the rapid fluctuations and more so because it was way beyond what the fundamentals justified. Indian industry and exports have been showing signs of slowing down. Due to rising inequality, the market in India is narrow and dependent for growth on investments and exports. Without doubt, exports will be adversely affected by the slowdown in the US.
Investments are likely to slowdown because of the industrial downturn and also because of the international trends. Both these factors will result in unutilised capacity appearing and leading to slowdown in investments and in the rate of growth. The rate of growth of the economy which rose on the back of a rise in the investment rate (from 25 per cent to 32 per cent) can show an equally dramatic fall. We may be back to a 4-5 per cent rate of growth which prevailed five years back.
The economy has been facing infrastructure bottlenecks, like in power and transportation. The food prices have been rising resulting in inflationary pressures and political problems. Oil prices have been high and even if they moderate due to the recessionary tendency, they will cause pressure on prices and profit margins. In other words, the problems already confronting the Indian economy leading to its slowdown will be aggravated by the international trends.
The optimists have been suggesting a decoupling between the US economy on the one hand and the EU and Asian economies on the other hand. It was being suggested that the growth momentum in the latter would compensate for the downturn in the US so that the world economy would still sail through with a minor slowdown. Indian analysts depending on this have been arguing that India would not be badly hurt by the slowdown in the US economy. They argue that India is not a large exporter and so the affect of slowdown would be small.
This line of argument misses the central point that now many of the markets are fairly integrated with the international markets. That has been the central point of the Structural Adjustment Package (SAP) being implemented in India since 1991. Even without full capital account convertibility, we have had elements of it. FIIs and NRI funds can come in and go out. Indian businessmen have been allowed to keep capital abroad, etc. Thus, the financial and real estate markets have been substantially integrated with the world markets. No wonder what happens abroad has immediate impact on Indian markets.
We have known that energy and food markets are integrated the world over. We have been witness to the impact of oil prices and rise in wheat prices. Thus, many of our markets are now open to influences from abroad. While it is true that we are not as open as many other economies (like Germany or Sri Lanka), we are twice as open today as we were in 1991. Hence the US economy has a much bigger impact today than earlier. Given the size of the US economy, a 1per cent reduction in its rate of growth would be bigger than a 10 per cent increase (to 20 per cent and that is unlikely) in the rate of growth of the Indian economy.
It may be argued that the cutting of the interest rates in the US and actions elsewhere will have a positive effect and prevent a downturn there. President Bush has announced a $150 billion package. He is putting purchasing power into the hands of individuals to boost demand. This would be about 1 per cent of the US GDP. However, what individuals may have lost in the sub-prime markets may be much larger and hence inadequate. Further, the decline in the stock markets and the fall in the paper wealth is also likely to far exceed this amount.
In other words, some feel that this effort may be too little, too late. There is nothing unusual in this since in business cycles it has been mostly found that in the downturn, intervention is usually too little too late so that the downturn becomes inevitable. In Japan, in the nineties when the interest rates even turned negative, the economy could not pull itself up.
The reason is that once the investors’ sentiments turn negative, there is little that the government can do to turn them around. This situation is currently aggravated by the free market philosophy where any form of government intervention is seen to be bad and, therefore, resisted till it is too late. Even when it does come, it is of the wrong variety. Governments following free market philosophy give concessions to the investors, hoping that they would invest more. However, because demand does not rise and unutilised capacity continues to rise, they invest little and the concession simply ends up raising unutilised capacity further. The medicine aggravates the disease.
Usually, in the downturn, the poor and the poorer countries are affected worse than the rich ones. For instance, the impact of the sub-prime crisis has been the greatest on the poor and the blacks in the US. The situation is being aggravated by the environmental consequences of the development path being followed in the recent past. With environmental costs of growth rising in a recession, the poor will suffer even more.
In India, where large infrastructure projects had been planned and companies were rushing to raise capital from the booming stock markets, there would be over-capitalisation and consequent losses. Indian companies have also been rushing to acquire expensive overseas assets. Such companies are likely to suffer substantial losses.
For India, the negatives seem to far outweigh any positives. Further, the impending slowdown/recession/depression in the world economy is likely to be quite different than the earlier ones since it is being driven by substantial unresolved problems in the financial sectors. No one, not even the largest actor on the scene, the Fed, understands what is going on so that correctives are hard to devise. Once the economy starts going downhill, many actions that would have been normal in a rising economy, like acquisitions through leveraging, investments in risky instruments, turn out to be mistakes. The various mistakes cumulatively amount to huge mistakes. Indian financial markets, substantially integrated into the world markets, are unlikely to be able to escape the impending crisis.
by Arun Kumar
www.tribuneindia.com. Feb 6, 2008.
The world economy is faced with a downturn. The issue is how deep and how quick it will be. The Prime Minister and the Finance Minister are trying to keep the flag flying and rallying the troops so that the rout is delayed. It is variously being suggested that India will not be affected by the downturn in the US economy which, according to some analysts, is already in a recession but since the data comes with a delay, it has not been officially acknowledged that the recession has started. The cuts in advertising expenditures in the US are an indication of the downturn.
The stock markets the world over are indicative of the negative mood of the investors. Adverse news is being greeted by huge declines in the indices. The US Central Bank, the Fed, has already cut interest rates twice in quick succession by a total of 1 per cent (unprecedented in recent history) signalling/acknowledging that indeed things are bad. In the US, for the first time in many years, employment is falling.
The Indian stock markets have also followed the overseas markets in the rapid fluctuations and more so because it was way beyond what the fundamentals justified. Indian industry and exports have been showing signs of slowing down. Due to rising inequality, the market in India is narrow and dependent for growth on investments and exports. Without doubt, exports will be adversely affected by the slowdown in the US.
Investments are likely to slowdown because of the industrial downturn and also because of the international trends. Both these factors will result in unutilised capacity appearing and leading to slowdown in investments and in the rate of growth. The rate of growth of the economy which rose on the back of a rise in the investment rate (from 25 per cent to 32 per cent) can show an equally dramatic fall. We may be back to a 4-5 per cent rate of growth which prevailed five years back.
The economy has been facing infrastructure bottlenecks, like in power and transportation. The food prices have been rising resulting in inflationary pressures and political problems. Oil prices have been high and even if they moderate due to the recessionary tendency, they will cause pressure on prices and profit margins. In other words, the problems already confronting the Indian economy leading to its slowdown will be aggravated by the international trends.
The optimists have been suggesting a decoupling between the US economy on the one hand and the EU and Asian economies on the other hand. It was being suggested that the growth momentum in the latter would compensate for the downturn in the US so that the world economy would still sail through with a minor slowdown. Indian analysts depending on this have been arguing that India would not be badly hurt by the slowdown in the US economy. They argue that India is not a large exporter and so the affect of slowdown would be small.
This line of argument misses the central point that now many of the markets are fairly integrated with the international markets. That has been the central point of the Structural Adjustment Package (SAP) being implemented in India since 1991. Even without full capital account convertibility, we have had elements of it. FIIs and NRI funds can come in and go out. Indian businessmen have been allowed to keep capital abroad, etc. Thus, the financial and real estate markets have been substantially integrated with the world markets. No wonder what happens abroad has immediate impact on Indian markets.
We have known that energy and food markets are integrated the world over. We have been witness to the impact of oil prices and rise in wheat prices. Thus, many of our markets are now open to influences from abroad. While it is true that we are not as open as many other economies (like Germany or Sri Lanka), we are twice as open today as we were in 1991. Hence the US economy has a much bigger impact today than earlier. Given the size of the US economy, a 1per cent reduction in its rate of growth would be bigger than a 10 per cent increase (to 20 per cent and that is unlikely) in the rate of growth of the Indian economy.
It may be argued that the cutting of the interest rates in the US and actions elsewhere will have a positive effect and prevent a downturn there. President Bush has announced a $150 billion package. He is putting purchasing power into the hands of individuals to boost demand. This would be about 1 per cent of the US GDP. However, what individuals may have lost in the sub-prime markets may be much larger and hence inadequate. Further, the decline in the stock markets and the fall in the paper wealth is also likely to far exceed this amount.
In other words, some feel that this effort may be too little, too late. There is nothing unusual in this since in business cycles it has been mostly found that in the downturn, intervention is usually too little too late so that the downturn becomes inevitable. In Japan, in the nineties when the interest rates even turned negative, the economy could not pull itself up.
The reason is that once the investors’ sentiments turn negative, there is little that the government can do to turn them around. This situation is currently aggravated by the free market philosophy where any form of government intervention is seen to be bad and, therefore, resisted till it is too late. Even when it does come, it is of the wrong variety. Governments following free market philosophy give concessions to the investors, hoping that they would invest more. However, because demand does not rise and unutilised capacity continues to rise, they invest little and the concession simply ends up raising unutilised capacity further. The medicine aggravates the disease.
Usually, in the downturn, the poor and the poorer countries are affected worse than the rich ones. For instance, the impact of the sub-prime crisis has been the greatest on the poor and the blacks in the US. The situation is being aggravated by the environmental consequences of the development path being followed in the recent past. With environmental costs of growth rising in a recession, the poor will suffer even more.
In India, where large infrastructure projects had been planned and companies were rushing to raise capital from the booming stock markets, there would be over-capitalisation and consequent losses. Indian companies have also been rushing to acquire expensive overseas assets. Such companies are likely to suffer substantial losses.
For India, the negatives seem to far outweigh any positives. Further, the impending slowdown/recession/depression in the world economy is likely to be quite different than the earlier ones since it is being driven by substantial unresolved problems in the financial sectors. No one, not even the largest actor on the scene, the Fed, understands what is going on so that correctives are hard to devise. Once the economy starts going downhill, many actions that would have been normal in a rising economy, like acquisitions through leveraging, investments in risky instruments, turn out to be mistakes. The various mistakes cumulatively amount to huge mistakes. Indian financial markets, substantially integrated into the world markets, are unlikely to be able to escape the impending crisis.
Monday, October 29, 2007
Share Market Gyrations: Thwarting National Policy Making
Share Market Gyrations: Thwarting National Policy Making
Arun Kumar
The Tribune, October 29, 2007
The share market has been giving the investors the jitters. Few know which way it would go next. Recently, after touching a peak of 19,198.66, the BSE index came down to 17,559.98 and more such fluctuations are in store. This was not unexpected given the rapid rise of the index in the preceding 2 months and especially in the preceding 2 weeks. Investors were getting used to hearing that the index had climbed by 1,000 points in 6 or in 4 trading sessions. It was a bullish market which seemed to have no stops. The media and specially the pink papers with screaming headlines were egging the investors on with stories of investor wealth going up by lakhs of crores and how Indian businessmen were becoming the wealthiest individuals in the world – and all this in a space of a few months. Heady stuff for a country which is still one of the poorest country in the world and 50th from the bottom in HDI ranking. Greed had been raised to a new high pedestal.
The news has been that foreign funds were investing heavily in the Indian markets. They are supposed to be attracted by the rising value of the rupee vis-à-vis the dollar and the high returns being offered by the Indian companies. There are several components of this flow from foreign shores. Rising oil prices have resulted in growing surpluses with the oil exporting countries and they have been looking for avenues to invest. Since the dollar has been declining, they are wary of parking all their funds in the US and in dollar securities so they have been looking for alternatives. The Indian markets which have been rising because its corporate sector has seen a massive surge of profits seem to provide a safe haven of high returns. What could be better than this?
The second component of this flow is the NRI funds which is also looking for diversification of portfolios for much the same reason. Till recently, they brought only little of their savings back to the country but now they are doing so in bigger amounts. According to the just released World Bank report, India is now the largest recipient of non resident transfers in the World. The third component is the flows from the high export earners like China who are also looking for safer havens and diversification to park their surpluses and reserves. China and Japan have over a trillion dollars of reserves which till recently were mostly in dollar related securities. The fourth component is the movements of funds by terrorist organizations, money launderers and smugglers, etc. Apart from continuing their political/business agendas in the country, they are also seeking diversification of their financial operations.
In the Indian context, the Participatory Note (PN) route which is a financial instrument operated by the FIIs has provided a new way of investing in the Indian markets in which the investors identity remains a secret. The secrecy is required since there is illegality and possibly criminality associated with these funds. About 50% of the FII funds now belong to this category. India’s National Security Advisor has expressed worry over the operations of illegal money and terrorists through the bourses, to channel funds not only for their own use but also perhaps to destabilize the economy at some point. RBI has expressed worry about this phenomenon and now the SEBI has followed suit.
This route has also been useful for the Indian politicians, businessmen and other corrupt people to bring back their black savings stocked abroad over the last many decades. They can whiten their money through this device. That is why the Indian establishment has not touched this route in spite of the ill effects it is having on the Indian economy in recent times. The Indian businesses have had another important reason to bring back their money, namely, to invest in their own businesses given the need to protect themselves from hostile takeovers. Further, as for others, of late, dollar havens are not all that safe or lucrative as compared to the home market.
Finally, the real estate boom in the last three years has peaked and some funds are being withdrawn from there to be parked in the rising share markets. In other words, quite a conjuncture of factors have fuelled the boom.
The Indian stock markets have been known for severe manipulations by the owners of companies, financiers and brokers who indulge in insider trading and fixing of prices (For an account of this, see this author’s book, The Black Economy in India published in 1999 by Penguin India). It is suspected that the recent boom has come in handy for such unscrupulous elements to take advantage and raise prices further. Often, owners of companies that are not doing well use this device to manipulate the price of their stocks and make huge sums of monies at the expense of the gullible small investors. Media is cynically used to plant stories. All this has been noticed in the past three stock market booms in the last 16 years. Something similar seems to be happening again.
Why do prices not shoot up like this in the mature economies? The reason is that the Indian markets are rather narrow. The organized sector of the Indian economy is less than 50% of the economy and employs only about 6% of the work force. If government is taken out of this, the rest would be the corporate sector which is broadly represented in the stock markets. Thus, the private corporate sector is not more than 30% of the national output and employs only 2% of the work force.
Further, the ownership of this sector rests with less than 0.1% of the population. The public owns only about 10% of the shares of the corporate sector. The vast bulk being held by promoters, FIIs, financial institutions and the like. In fact, a large part of the FII holding also belongs to the friends of the promoters so that no threat of takeover emerges. In companies like WIPRO or Infosys, the number of stock holders is less than a few thousand and the owners and FIIs own around 90% of the equity stock.
The result is small floating stock of shares (especially of the good companies) in the Indian markets and little relationship with the larger economy so that small infusion of funds can cause large price changes. This along with the above mentioned manipulations make the Indian markets volatile. This is compounded by the fact that the return on stocks is largely made up of capital gains and not dividend. Thus, if the market stops rising the expected return becomes very small and then it is not worth investing. In other words, when prices change rapidly, there is no stable resting point for the stock markets. A rapid rise invariably leads to an equally rapid opposite movement. Fluctuating markets do not move with the fundamentals. In fact, most of the time, they are not in sync.
The increase in wealth associated with the stock market book is notional. It is based on small amount of trades and does not correspond to any real increase in wealth. This causes imbalances in the economy because it is concentrated in the hands of less than 0.1% of the economy and spells danger for the country with vast sections getting marginalized and instability in society rising. It results in devaluation of work and weakening of democracy.
In brief, the PN story and the market gyrations suggest that the Indian markets are substantially driven by government policies as manipulated by vested interests. Today, they exercise their influence as members of Parliament, Ministers and member of advisory boards of legislative and governmental bodies. These interests have become accustomed to having things their way so even a slight disturbance comes as a rude shock, like, the news that PN story may be coming to an end because it is not good for the vast majority of Indians. Under the circumstances, can good policy or national policy making other than what suits these vested interests make sense?
nuramarku@gmail.com
Arun Kumar
The Tribune, October 29, 2007
The share market has been giving the investors the jitters. Few know which way it would go next. Recently, after touching a peak of 19,198.66, the BSE index came down to 17,559.98 and more such fluctuations are in store. This was not unexpected given the rapid rise of the index in the preceding 2 months and especially in the preceding 2 weeks. Investors were getting used to hearing that the index had climbed by 1,000 points in 6 or in 4 trading sessions. It was a bullish market which seemed to have no stops. The media and specially the pink papers with screaming headlines were egging the investors on with stories of investor wealth going up by lakhs of crores and how Indian businessmen were becoming the wealthiest individuals in the world – and all this in a space of a few months. Heady stuff for a country which is still one of the poorest country in the world and 50th from the bottom in HDI ranking. Greed had been raised to a new high pedestal.
The news has been that foreign funds were investing heavily in the Indian markets. They are supposed to be attracted by the rising value of the rupee vis-à-vis the dollar and the high returns being offered by the Indian companies. There are several components of this flow from foreign shores. Rising oil prices have resulted in growing surpluses with the oil exporting countries and they have been looking for avenues to invest. Since the dollar has been declining, they are wary of parking all their funds in the US and in dollar securities so they have been looking for alternatives. The Indian markets which have been rising because its corporate sector has seen a massive surge of profits seem to provide a safe haven of high returns. What could be better than this?
The second component of this flow is the NRI funds which is also looking for diversification of portfolios for much the same reason. Till recently, they brought only little of their savings back to the country but now they are doing so in bigger amounts. According to the just released World Bank report, India is now the largest recipient of non resident transfers in the World. The third component is the flows from the high export earners like China who are also looking for safer havens and diversification to park their surpluses and reserves. China and Japan have over a trillion dollars of reserves which till recently were mostly in dollar related securities. The fourth component is the movements of funds by terrorist organizations, money launderers and smugglers, etc. Apart from continuing their political/business agendas in the country, they are also seeking diversification of their financial operations.
In the Indian context, the Participatory Note (PN) route which is a financial instrument operated by the FIIs has provided a new way of investing in the Indian markets in which the investors identity remains a secret. The secrecy is required since there is illegality and possibly criminality associated with these funds. About 50% of the FII funds now belong to this category. India’s National Security Advisor has expressed worry over the operations of illegal money and terrorists through the bourses, to channel funds not only for their own use but also perhaps to destabilize the economy at some point. RBI has expressed worry about this phenomenon and now the SEBI has followed suit.
This route has also been useful for the Indian politicians, businessmen and other corrupt people to bring back their black savings stocked abroad over the last many decades. They can whiten their money through this device. That is why the Indian establishment has not touched this route in spite of the ill effects it is having on the Indian economy in recent times. The Indian businesses have had another important reason to bring back their money, namely, to invest in their own businesses given the need to protect themselves from hostile takeovers. Further, as for others, of late, dollar havens are not all that safe or lucrative as compared to the home market.
Finally, the real estate boom in the last three years has peaked and some funds are being withdrawn from there to be parked in the rising share markets. In other words, quite a conjuncture of factors have fuelled the boom.
The Indian stock markets have been known for severe manipulations by the owners of companies, financiers and brokers who indulge in insider trading and fixing of prices (For an account of this, see this author’s book, The Black Economy in India published in 1999 by Penguin India). It is suspected that the recent boom has come in handy for such unscrupulous elements to take advantage and raise prices further. Often, owners of companies that are not doing well use this device to manipulate the price of their stocks and make huge sums of monies at the expense of the gullible small investors. Media is cynically used to plant stories. All this has been noticed in the past three stock market booms in the last 16 years. Something similar seems to be happening again.
Why do prices not shoot up like this in the mature economies? The reason is that the Indian markets are rather narrow. The organized sector of the Indian economy is less than 50% of the economy and employs only about 6% of the work force. If government is taken out of this, the rest would be the corporate sector which is broadly represented in the stock markets. Thus, the private corporate sector is not more than 30% of the national output and employs only 2% of the work force.
Further, the ownership of this sector rests with less than 0.1% of the population. The public owns only about 10% of the shares of the corporate sector. The vast bulk being held by promoters, FIIs, financial institutions and the like. In fact, a large part of the FII holding also belongs to the friends of the promoters so that no threat of takeover emerges. In companies like WIPRO or Infosys, the number of stock holders is less than a few thousand and the owners and FIIs own around 90% of the equity stock.
The result is small floating stock of shares (especially of the good companies) in the Indian markets and little relationship with the larger economy so that small infusion of funds can cause large price changes. This along with the above mentioned manipulations make the Indian markets volatile. This is compounded by the fact that the return on stocks is largely made up of capital gains and not dividend. Thus, if the market stops rising the expected return becomes very small and then it is not worth investing. In other words, when prices change rapidly, there is no stable resting point for the stock markets. A rapid rise invariably leads to an equally rapid opposite movement. Fluctuating markets do not move with the fundamentals. In fact, most of the time, they are not in sync.
The increase in wealth associated with the stock market book is notional. It is based on small amount of trades and does not correspond to any real increase in wealth. This causes imbalances in the economy because it is concentrated in the hands of less than 0.1% of the economy and spells danger for the country with vast sections getting marginalized and instability in society rising. It results in devaluation of work and weakening of democracy.
In brief, the PN story and the market gyrations suggest that the Indian markets are substantially driven by government policies as manipulated by vested interests. Today, they exercise their influence as members of Parliament, Ministers and member of advisory boards of legislative and governmental bodies. These interests have become accustomed to having things their way so even a slight disturbance comes as a rude shock, like, the news that PN story may be coming to an end because it is not good for the vast majority of Indians. Under the circumstances, can good policy or national policy making other than what suits these vested interests make sense?
nuramarku@gmail.com
Thursday, September 13, 2007
The Share Market and The Reality Check
The Share Market and the Reality Check
Arun Kumar
CESP/SSS, JNU.
The Tribune, September 13, 2007.
The Stock Market in India has been going through a roller coaster. After rising sharply for a few months and reaching a peak on July 24 (Sensex, 15,869), it started fluctuating. It dropped sharply on July 27 (542 points), August 1(615 points) and then on August 16 (643 points). These have been the biggest 3 falls but there have been others, like on August 21, 2007 (438 points). The investor is breathless not knowing which way to go. Some, like the SEBI chief have argued that there is nothing to worry or the Finance Minister has reiterated that the economy is doing well (implying, nothing to worry). The investor is sought to be convinced that the fundamentals of the economy are good and that there is no need to panic.
It is clear that the crisis has hit suddenly, something even the FM or the RBI were not able to anticipate. The recent RBI Report in July made no mention of any such possibility. If those with all the economic intelligence at their command, could not read the coming events, can the investor do better? All this is reminiscent of occurrences in the last 16 years when many have lost heavily. Can the assurance that the fundamentals are good be believed? Two important points need to be kept in mind.
First, the stock market is not always directly linked to the fundamentals of the economy. If it was, with the fundamentals being good, as the Finance Minister and the experts say, why the repeated sharp fall? Compared to the July 24 peak on August 21, 2007, it was down by 12%. Now it is recovering.
The stock market is essentially based on short run expectations. Some expect it to rise and buy to make a gain (the bulls) while others expect it to fall so they sell to make a profit (the bears). At any given time, there are bulls and bears operating to keep the market in equilibrium. If no one is buying (no bulls), the market would collapse as happened on the manic Monday last year. If there are no sellers (no bears) the market would rise sharply. Further, a bull in the morning may be a bear the afternoon. The positions keep switching because of the changing expectations. If the market has risen sharply, some begin to expect it to fall and turn bearish and vice versa.
Short term factors, like, a CBDT circular, the news of FII withdrawing or instability of government move markets. Long term features of the economy and politics also have a bearing but these signals are read in the immediate context and often there are over reactions. For instance, what would be the effect of reservations on the corporate sector or whether the left front is going to push the UPA government harder in the context of the nuclear deal?
What role do the economic fundamentals play? The stock market reflects the health of the corporate sector but they constitute 30% of the output of the economy. Indirectly, this may also reflect the health of the overall economy but often not. Till July 24, when the market rose sharply, it was unaffected by the growing social unrest in the country, increasing criminalization, rising unemployment or the farmers committing suicide. Currently, the declines are due to the failure of the sub prime loans market in the USA which has little to do directly with the Indian economy or its fundamentals.
Even if the fundamentals are important there is no particular level of the stock market indices that is commensurate with a given level of the fundamentals? There is no one to one correspondence between the two. The Harshad Mehta induced boom in 1992 was co-terminus with a sharp decline in the rate of growth of the economy. Similar was the case during the Ketan Parikh induced boom. Yes, the economy has grown at about 8% in the last three years. Does that justify a 250% rise in the stock market indices? The corporate sector profits have risen sharply by about 30% but even that does not justify the rise.
In effect, the sharp rise in the indices has meant that the market has been going out of sync with reality. Consequently, average returns on the stocks have been falling. Why do the investors still invest? Because of the expected capital gains. In a bull market, it is the expected capital gain that drives investments. This is an unstable situation. If the rate of rise of the market slows down, the rate of return falls and the investors start turning into bears. The market tends to reverse gear. The big players with their analysts, control over chunks of stocks and association with brokers are able to see the signs and retrieve some of their positions. Usually in a boom, greed brings in small investors and they are the ones to suffer the losses when the market falls.
The market mostly consists of the big fish. According to published data, in 2004-05 only 1,40,000 individuals bought shares worth more than Rs. 1 lakh – a mere 0.00001 % of the population. Public holding of the shares of the stock markets is hardly a few per cent. Over 80% is held by the big investors. Thus, the small investors are marginal to the market and they tend to get locked in. The losses for the big investors are mostly on paper. The higher valuation during the boom reverses when the market falls but the original capital is usually intact and they periodically book profits.
The second issue is that in times of turbulence, no one is able to predict the market given the uncertainty, the manipulations by the big investors and insider trading. In the case of the sub-prime market collapse, the Federal Bank of the USA was also caught off guard. After the event, many now argue that the bomb was ticking but few predicted it, certainly not the Federal Bank. Indian markets are getting affected because some FIIs are withdrawing money to shore up their US operations which are the more important ones for them. In this situation where do the fundamentals of the Indian economy enter the picture?
In most situations of decline of the stock markets even the finance ministry cannot predict what will happen (otherwise it would take corrective steps). What it usually does is to put pressure on the financial institutions, like, on public sector banks and insurance companies to support the market to prevent a drastic fall. No wonder, the public financial institutions suffer in the process (as happened earlier to the UTI which collapsed). This may be taking place now also.
This is the key to the problem of the Indian small investors. Today, the government’s economic performance is judged by the rise in the stock markets. The Ministry has signaled to the operators that they can be bulls without worry since the ministry would send signals to the right places to support the market, if it falls. The ministry has been favouring the market by diluting capital gains tax and eliminating the dividend and the wealth taxes. But these are precisely the instruments that used to keep speculative activity in check. In their absence, boom and bust are bound to be aggravated. To be successful, one has to successfully predict what the majority will do - know the minds of the FIIs and those indulging in insider trading. No small investor with a little bit of savings can easily do this, so the stock market is not for them.
What the government does not seem to factor in is that the speculative activity in the stock market affects other investments adversely. We need investments in agriculture, small scale industry and physical infrastructure but if one can make money in the short run then why invest in the real economy and get a return much later? A steady market is better all around than a volatile one but the present policies are an anti-thesis of this.
In brief, the US sub prime market, liquidity problems, political turmoil due to the Congress - Left disagreement on the nuclear issue are important to explain the stock market instability but the reality check is the speculation induced by the policy makers to gain brownie points with finance capital.
nuramarku@gmail.com.
Arun Kumar
CESP/SSS, JNU.
The Tribune, September 13, 2007.
The Stock Market in India has been going through a roller coaster. After rising sharply for a few months and reaching a peak on July 24 (Sensex, 15,869), it started fluctuating. It dropped sharply on July 27 (542 points), August 1(615 points) and then on August 16 (643 points). These have been the biggest 3 falls but there have been others, like on August 21, 2007 (438 points). The investor is breathless not knowing which way to go. Some, like the SEBI chief have argued that there is nothing to worry or the Finance Minister has reiterated that the economy is doing well (implying, nothing to worry). The investor is sought to be convinced that the fundamentals of the economy are good and that there is no need to panic.
It is clear that the crisis has hit suddenly, something even the FM or the RBI were not able to anticipate. The recent RBI Report in July made no mention of any such possibility. If those with all the economic intelligence at their command, could not read the coming events, can the investor do better? All this is reminiscent of occurrences in the last 16 years when many have lost heavily. Can the assurance that the fundamentals are good be believed? Two important points need to be kept in mind.
First, the stock market is not always directly linked to the fundamentals of the economy. If it was, with the fundamentals being good, as the Finance Minister and the experts say, why the repeated sharp fall? Compared to the July 24 peak on August 21, 2007, it was down by 12%. Now it is recovering.
The stock market is essentially based on short run expectations. Some expect it to rise and buy to make a gain (the bulls) while others expect it to fall so they sell to make a profit (the bears). At any given time, there are bulls and bears operating to keep the market in equilibrium. If no one is buying (no bulls), the market would collapse as happened on the manic Monday last year. If there are no sellers (no bears) the market would rise sharply. Further, a bull in the morning may be a bear the afternoon. The positions keep switching because of the changing expectations. If the market has risen sharply, some begin to expect it to fall and turn bearish and vice versa.
Short term factors, like, a CBDT circular, the news of FII withdrawing or instability of government move markets. Long term features of the economy and politics also have a bearing but these signals are read in the immediate context and often there are over reactions. For instance, what would be the effect of reservations on the corporate sector or whether the left front is going to push the UPA government harder in the context of the nuclear deal?
What role do the economic fundamentals play? The stock market reflects the health of the corporate sector but they constitute 30% of the output of the economy. Indirectly, this may also reflect the health of the overall economy but often not. Till July 24, when the market rose sharply, it was unaffected by the growing social unrest in the country, increasing criminalization, rising unemployment or the farmers committing suicide. Currently, the declines are due to the failure of the sub prime loans market in the USA which has little to do directly with the Indian economy or its fundamentals.
Even if the fundamentals are important there is no particular level of the stock market indices that is commensurate with a given level of the fundamentals? There is no one to one correspondence between the two. The Harshad Mehta induced boom in 1992 was co-terminus with a sharp decline in the rate of growth of the economy. Similar was the case during the Ketan Parikh induced boom. Yes, the economy has grown at about 8% in the last three years. Does that justify a 250% rise in the stock market indices? The corporate sector profits have risen sharply by about 30% but even that does not justify the rise.
In effect, the sharp rise in the indices has meant that the market has been going out of sync with reality. Consequently, average returns on the stocks have been falling. Why do the investors still invest? Because of the expected capital gains. In a bull market, it is the expected capital gain that drives investments. This is an unstable situation. If the rate of rise of the market slows down, the rate of return falls and the investors start turning into bears. The market tends to reverse gear. The big players with their analysts, control over chunks of stocks and association with brokers are able to see the signs and retrieve some of their positions. Usually in a boom, greed brings in small investors and they are the ones to suffer the losses when the market falls.
The market mostly consists of the big fish. According to published data, in 2004-05 only 1,40,000 individuals bought shares worth more than Rs. 1 lakh – a mere 0.00001 % of the population. Public holding of the shares of the stock markets is hardly a few per cent. Over 80% is held by the big investors. Thus, the small investors are marginal to the market and they tend to get locked in. The losses for the big investors are mostly on paper. The higher valuation during the boom reverses when the market falls but the original capital is usually intact and they periodically book profits.
The second issue is that in times of turbulence, no one is able to predict the market given the uncertainty, the manipulations by the big investors and insider trading. In the case of the sub-prime market collapse, the Federal Bank of the USA was also caught off guard. After the event, many now argue that the bomb was ticking but few predicted it, certainly not the Federal Bank. Indian markets are getting affected because some FIIs are withdrawing money to shore up their US operations which are the more important ones for them. In this situation where do the fundamentals of the Indian economy enter the picture?
In most situations of decline of the stock markets even the finance ministry cannot predict what will happen (otherwise it would take corrective steps). What it usually does is to put pressure on the financial institutions, like, on public sector banks and insurance companies to support the market to prevent a drastic fall. No wonder, the public financial institutions suffer in the process (as happened earlier to the UTI which collapsed). This may be taking place now also.
This is the key to the problem of the Indian small investors. Today, the government’s economic performance is judged by the rise in the stock markets. The Ministry has signaled to the operators that they can be bulls without worry since the ministry would send signals to the right places to support the market, if it falls. The ministry has been favouring the market by diluting capital gains tax and eliminating the dividend and the wealth taxes. But these are precisely the instruments that used to keep speculative activity in check. In their absence, boom and bust are bound to be aggravated. To be successful, one has to successfully predict what the majority will do - know the minds of the FIIs and those indulging in insider trading. No small investor with a little bit of savings can easily do this, so the stock market is not for them.
What the government does not seem to factor in is that the speculative activity in the stock market affects other investments adversely. We need investments in agriculture, small scale industry and physical infrastructure but if one can make money in the short run then why invest in the real economy and get a return much later? A steady market is better all around than a volatile one but the present policies are an anti-thesis of this.
In brief, the US sub prime market, liquidity problems, political turmoil due to the Congress - Left disagreement on the nuclear issue are important to explain the stock market instability but the reality check is the speculation induced by the policy makers to gain brownie points with finance capital.
nuramarku@gmail.com.
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