UP elections and economic reforms

January 18th, 2012

The economic reforms are stuck. The government at the centre (UPA) has been jammed since long. Some of the major reforms have gone to the backburner manily because of the electoral politics being played by the major alliance partners. Mamata Banerjee has suddenly become the villan for having opposed FDI in retail and then again putting her foot down at the time of the Rajya Sabha voting for the Lokpal. Rumours tell us she has been instrumental in opposing a large number of reform oriented bills the UPA has wanted to introduce.

If the above is true, then has the UPA decided upon a strategy to tackle the Kolkata Lady or has it resigned itself to time? The outcome of the elections in Uttar Pradesh may throw up some light on the future course of the economic policies of the UPA. Going by the current trends, it is clear that the BJP and the Congress are fighting for the third and the fourth place. That leaves BSP and SP in the race for the top slot. Anybody who has been following the trend in UP will clearly agree that the gap between the second and third in the UP outcome will be huge.

Given the above scenario, both BJP and Congress will be happy to play king makers. This is where the future of the UPA’s economic reforms comes into play. If SP manages a close second and is able to form a government in the state with some support, Congress will be the first to spring up and help. Of course, in return it will expect the 23 MPs of the SP to become a part of the UPA in the centre. This will ensure the UPA does not have to depend on Mamata, who controls only 19 MPs. If this scenario becomes a reality, the UPA may be in a position to take a strong stand on certain economic reforms without bothering about the noise created by Mamata Banerjee. Hence all hopes of economic reforms (much needed) now depend upon whether the SP can cycle (its election symbol) its way to power in UP.

But hold on, weren’t we taught economic reforms are dependent upon the state of the economy and not on the election outcomes of a particular state? Well, it seems times have changed since we were taught this, so let’s adjust to the new reality. So the UP election results hold the key to the future of the economic reforms in India. Let’s all wait for them.

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The quality of the Indian human resource

January 2nd, 2012

Employees First, Customers Second is an interesting management book. The entire book is based on a simple logical chain – take care of the employees of the organisation – they will take care of the customers – and the satisfied customers in turn will take care of the shareholders. Make an organisation internally strong and it automatically takes care of the external stakeholders. The learning from the book is immense not only for a corporate leader but also for a government like ours.

There was a time when corporates were known by the brick and mortar – the physical assets they possessed. The great powershift changed all that. Modern corporates are now known for the minds they possess. Like the great powershift in the corporate world, similar revolutionary changes are going to sweep the economies. In future it will be the quality of the human resource possessed by the economies which will determine their relative strength. The theories which have been doing the rounds for the past decade or so, such as Bottom of the Pyramid, Demographic Dividends etc., will be seriously put to challenge since these are primarily based on the quantity and not the quality.

We, in India, will be among the most severely affected by these changes. Over the past several decades, we, as a nation, have collectively shunned our responsibility towards the quality aspects of the population. The two basic needs of the population – education and health – are the scarcest in this country. The government has miserably failed in fulfilling its primary responsibility towards its subjects as far as health and education are concerned. In fact the acute shortage of these basic necessities has converted them into huge business opportunities. Large amounts of private enterprises are expected to come into these fields. The government has successfully managed to transfer its obligation into private hands.

This, in the long run, will have disastrous consequences for the Indian economy. The quality of the Indian human resource will rank the highest among the various infrastructure factors crucial to sustaining the country’s rapid economic growth. In fact, this will be the single most critical factor for the success of the country. Leaving the most critical of factors responsible for the sustaining of the economy in private hands is itself not a comforting thought.

If this experiment of the government fails, the much-touted Indian “demographic dividend” (considered as a panacea for all the economic ills of the country) is more likely to boost the development of a society beset with uneducated and unhealthy youth rather than an educated working class who would be able to make a positive contribution to the gross domestic product.

For most part of the previous decade, the story of rising India has eclipsed the mind of every Indian so much so that certain commentators (political and otherwise) have started dreaming of a global economic revival led by India. It would be wonderful to have their dream fulfilled but the turn of events in the past year have made the thinking brain realise that dreams can also be shattered if the right steps are not taken to achieve them. And caring for the qualitative aspect of the human resource of the country is definitely the most important step in the direction of achieving the great Indian dream.

Hope the government is listening.

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Indian economy: a messy situation

December 22nd, 2011

At the beginning of the financial year the mandarins who run the Indian economy were being lauded for steering the country out of the global mess with remarkable ease and very little damage. Those were the days when a growth rate of 9-10% was considered as being the most natural growth rate for India. The country started the year with a dream of becoming the Pied Piper for global growth. But now, with extremely dismal macro-economic numbers coming, the ground situation seems to be very different. Dreams seldom become reality — as always.
The high rates of inflation, the corresponding fall in the value of the Rupee, the dismal GDP growth figures and industrial production numbers just released…the list can go on and on -– a sorry state of affairs.

Everything in this economic climate may be uncertain -– but one thing remains certain – the economic slowdown has arrived and this one is going to be far worse than the one we witnessed a few years back. The slump looks relatively broad based, covering a range of industry and service sectors.

The bad news does not end here, the dismal show of the internal economy is coupled with bad news outside. Right from one end of the globe to the other, economies wait with baited breadth as the never ending saga of bad news from the rich nations continues. The extent of damage to be inflicted on India by this is still not known but it is sure there will be damage.

And to top it all, we have a government which is turning out to be one of the worst non- performers — be it from taking policy initiatives to stem the downslide or combating corruption. This is fast turning out to be the icing on the cake. And like all cakes, even here the icing first has to melt. The government has to be forced into action and only then will the other parameters be brought under control. If the government actually thinks that the economic engine will start rolling again without any policy intervention, it is most unlikely.

Managing an economy is like riding a motorcycle, when it is at a great speed, balancing is easy but the real challenge in balancing is faced when the motorbike slows down. A deft rider can balance a slow bike and speed up again. An inexperienced one can only stop if the bike slows.

We can only hope the economy is not in the hands of an inexperienced rider.

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India becomes richer, Indians poorer

December 12th, 2011

According to a new report by the Organisation for Economic Cooperation and Development (OECD) inequality in earnings has doubled in India over the past two decades, making it one of the worst performers among emerging economies which include Argentina, Brazil, China, South Africa and Russia. According to the report, the top 10% of wage-earners make 12 times more than the bottom 10%, compared to six times 20 years ago — a sign that inequality of income is increasing by the year.

Unfortunately, this has happened during a period which is touted as the golden period of economic reforms in India. During this period, the country has seen unprecedented growth rates which have created an aura of INDIA GROWING. There is no doubt that India is a growing nation and on most of the macroeconomic (GDP-based) indicators, the country has done better than its peers. However this report raises serious doubt whether the large part of India (which still remains very poor) has benefitted from this growth period or not. The findings of the report clearly indicate that the growth in India has been very deep but not wide. The inclusive factor in the growth has been totally missing. Infact if one is to go by the report numbers, the growth in India has been exclusive, leaving a large part of the population untouched. These are surely not good signs for the future of the country.

Even in terms of absolute numbers, India has the highest number of poor in the world. Around 42% of its 1.21 billion people live on less than $1.25 a day.

As far as comparison with other emerging economies is concerned the report finds that Brazil, Indonesia and Argentina, on some indicators have recorded significant progress in reducing inequality over the past 20 years. By contrast, China, India, the Russian Federation and South Africa have all become less equal over time.

The situation is really grave and is a matter of great concern even more when we have a government which continuously claims as having introduced the most amount of welfare measures in the form of MNREGA and such like. It is time that the government came to grips with the situation and started taking corrective policy measures aimed at a ensuring a more egalitarian growth. As far as the aid programmes are concerned, the less said the better, but nonetheless it is known that they are beset with corruption, bad administration and leakages.

 

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Government support to private business

November 29th, 2011

The recent controversy with respect to the government bailout package for Kingfisher Airlines brought to light some interesting issues in the public domain. The main argument against the sanction of a bailout package was that Kingfisher was a private enterprise and public money (i.e. taxpayer’s contribution) should not be utilised for the purposes of bailing out a private enterprise. Rahul Bajaj chipped in with his usual one liner saying that private enterprise is all about risk and reward – the government cannot insulate a private entrepreneur from the risk of failure.

Once an official denial came regarding the bailout package, it seems all has become quiet on that front. Unfortunately the controversy did not last enough to stir a debate on the larger question regarding the theory of the extent of government support to private business which still remains unanswered.

Merely arguing that the bailout package should be denied because Kingfisher is an enterprise run by the private entrepreneur does not muster support in the true economic sense. The argument looks even more devoid of economic logic when we contrast this with the government decision to hand  (repeatedly) bailout packages to Air India (the latest being discussed is for about 30 thousand crores). Even in the countries where capitalism is considered as a religion, during periods of economic crisis, government bailout packages for private enterprise is very common. The US bailout packages for the banks in 2008 and the current European rescue plan are examples in this direction. Hence to feel that a private enterprise should and can never get a government bailout package is not correct.

Governments need to ascertain the exact reasons which plague the enterprise which have resulted in the current situation and they also need to ascertain the fallout of the failure of the private enterprise on the economy as a whole before deciding upon the need for a bailout. In fact, empirical evidence of such government interventions has shown that the cause is not that important as is the effect of the failure.

Today there is no debate as to why the banks in the US reached a situation where the government had to pump in billions of dollars to keep them in business. The analysis of the causes of the failure can only decide the nature of the bailout package. In India the concept of bailout packages is very common - maybe not in the form of a direct cash bail out but camouflaged in the form of fiscal incentives like tax concessions etc. In the former there is the application of the tax collected while in the later the collections are reduced at source.

As the economies across the globe come to grips with reduced growth rates, the question of the extent of government support to private business will raise its ugly head again and again. Merely denying Kingfisher a bailout package is not an answer, what is needed today specially in our country is a full-fledged national debate on the issue.

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Policy response to economic slowdown

September 15th, 2011

Logic dictates, one cannot deny what has already happened. Unfortunately Indian policy makers are doing just that. The economic slowdown has arrived in India and there is no point in denying. Early acceptability of this fact will only help us arrive at early solutions.

Over the past nine months, as the government was busy responding to allegations of corruption, very little has been done to prepare the country for the impending economic crisis. In fact it now appears that the government was not even aware that the country is going to face a crisis on the economic front.

Inflation is nearing double-digit levels despite repeated assurances from policy makers that it will be tamed, the Indian currency is at a two-year low, the IIP numbers are not encouraging at all, and to sum all these up, international agencies like ADB etc. have now revised the country’s growth projections downward for the current year.

What is most amazing is the policy response (or rather no response) to all of this. Let us take the July IIP numbers which were released recently. The numbers were disappointing and the moment they were released, the comments started pouring in. But if one looks back at the way the macro economic numbers have been coming over the past few months, the IIP number should not surprise. Car sales were slowing on a monthly basis, FMCG numbers have not been too encouraging and obviously the inventory of residential properties was on the rise, so it was known that the slowdown is coming. I don’t know why people were surprised. What amazes me the most is that even top government functionaries (Pranab Mukherjee, Kaushik Basu etc.) expressed surprise at the numbers. Policy makers at such levels should be acting and not reacting. Reactions are for people down the line.

The fact that Indian policy makers had very little clue of what was happening and were obviously a confused lot was clear when Kaushik Basu (Chief Economic Advisor) commented that the policy of the RBI with respect to tight money (high interest rates) needs a relook. The central bank has been hiking interest rates since March, 2010, in its bid to tame inflation, so what was Mr. Kaushik Basu doing all this while? Was he not a party to the policy decision of hiking interest rates?

The time has come when policy makers should take actions based on what is happening and not on what has happened. The best economists are the ones who predict the future and take actions accordingly, the second best are the ones who understand the current happenings and accordingly take policy decisions and of course you have the third lot of economists who wait for some statistical numbers and then react. The current economic woes being faced by India can surely not be cured by the third lot.

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100 days of Mamata Banerjee

September 6th, 2011

Mamata Banerjee (a.k.a. didi) has just completed 100 days as Chief Minister. The manner in which she has swept into the portals of power in West Bengal, rising like a phoenix, (leading the 13-year-old Trinamool Congress party) after 34 years of uninterrupted Marxist rule reminds me of Rajiv Gandhi’s euphoric and historic victory in 1984.

There are striking similarities between the two historic wins. Winning 411 seats in the Lok Sabha, Congress created history in the 1984 elections under the leadership of Rajiv Gandhi. The euphoric victory was not only influenced by the sympathy wave (the tragic assassination of Mrs. Indira Gandhi), but Rajiv Gandhi also benefited from his appeal to the youth and a general perception of being Mr. Clean, or free of a background in corrupt politics. Rajiv thus revived hopes and enthusiasm for a clean governance amongst the Indian public. There was a huge burden of expectation on his shoulder. Similar is the situation of didi – the expectation index is very high and comprises all sections of the society.

Didi has openly remarked that she is in a hurry and needs to take quick action on pending issues and if the actions go wrong is willing to make amends. She prefers this to the wait and think approach which she feels may lead to no action at all.

Brilliant thinking on the part of a politician of the calibre of didi who is actually a leader of the masses, but this thinking has one big flaw. The masses do not forgive mistakes when they exercise their franchise. And if the expectation index is very high for a party in power, the chances of making mistakes is that much higher. This should always be remembered by didi. Even Rajiv Gandhi had openly acknowledged (addressing the Joint Session of the US Congress and India) that India was impatient. But while he was in power, a string of decisions taken hurriedly and under wrong advice led to a total fall in the popularity charts and by the time it was 1989, (the next elections) we saw the congress reduce its tally to 197. It was decisively voted out of power. Along with this defeat, the period of political domination by the Congress came to an end. The Congress has not been able to regain that domination till date.

The people of West Bengal have voted for didi with a lot of hope that her rule will mark the beginning of a new dawn in the history of the state. Already within the first 100days the beginnings of a new dawn are visible but we understand that it is very difficult to have a bright new start when the night has been so long and dark. In the quest to usher in a bright new morning, didi has to make sure she does not do a-la Rajiv and ends up without power in 2016 when the people of the state evaluate her first term as chief minister.

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MNREGA – Unemployment dole

August 28th, 2011

The RBI in its recent report on the state of the economy, while cautioning about the growth rate, has clearly mentioned that inflation needs to be controlled. One of the important reasons for inflation is the rise in base wage rates in the country without a corresponding increase in productivity.

This is a direct attack on MNREGA (obviously without naming the scheme), which happens to be the flagship social sector scheme of the UPA.

The MNREGA may be helping the rural poor in inching above the poverty line but it is surely not helping the nation as a whole. The scheme, as the name suggests, is required to guarantee a certain number of days of employment to every beneficiary. It is true that employment is provided, but unfortunately, the employment is not into any productive avenue. This results in a situation where the beneficiaries are in disguised unemployment. The money provided to such beneficiaries is nothing but an unemployment dole.

The success of MNREGA has resulted in money being pumped into the economy without a corresponding increase in the production. This is an indirect way of monetising the economy and will obviously result in inflation.

In certain industrial clusters, the MNREGA has resulted in a reverse migration of workforce. Menial unskilled labour is now in short supply. The labour force now tends to migrate to its homeland and get itself enrolled into MNREGA rather than sweat it out in the work place. Most of the industrial units in such clusters today have a permanent board outside there factory gates – LABOUR REQUIRED. This has resulted in either stoppage of production or increase in the wage rate above MNREGA – Both results again leading to inflation.

Last but not the least, the continued success of MNREGA over a longer period of time will have a very damaging impact on the social structure of the Indian rural household. The beneficiaries would continue to earn income without any corresponding hard work. Such households would never value money and if they remain beneficiaries under the scheme for a number of years, would end up being a lethargic lump of flesh and bones who would be accustomed to earning income without any effort. A nation looking forward to becoming a manufacturing hub for the entire world would surely not want a labour force of this kind.

In the good old days of the USSR, the Soviet Republic use to boast of full employment. This used to be explained to us by way of a joke in our economics class – In Moscow two people are required to operate an escalator – one sitting at the bottom to switch on the escalator the moment a person steps on it and the other at the top to switch it off the moment the person steps off the escalator. This takes care of two employable hands that are compensated by the state. Glasnost and Perestroika showed us the true colours of this full employment myth.

India cannot afford to follow this path. Immediate corrective steps are required to ensure that the beneficiaries of MNREGA are put to productive use; be it in the development of infrastructure or industries. If such steps are not taken now, what the RBI has hinted obliquely will become a major reason for some of the economic ills the country would face in the future.

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Public opinion and policy formulation

August 23rd, 2011

Indian democracy is facing a crisis of a very unique kind. The Parliament -– the ultimate symbol of Indian democracy and the place where laws are formulated -– is under siege.

The Parliament is also known as the house of peoples’ representatives. The people of India are represented by these handfuls of Parliamentarians, whose main work is to ensure that the voice of the people whom they represent is heard in the Parliament. Through these representatives, the Indian public becomes a part of the law-making process. This is the basis of our democracy.

The current controversy surrounding the Lokpal Bill has shown that there is a total disconnect between the public and its representatives. In fact, going by the growing support for Anna at the Ramlila Maidan, it appears that the peoples’ representative have no clue of what the people whom they represent want. If this is true, it would not be unreasonable to conclude that the peoples’ representatives once elected to the Parliament get so overwhelmed by the arrogance of power that they forget about the people and go back to the people only when the time for the next election comes up. This is an extremely dangerous sign for a democracy.  If this condition persists for a little longer, arrogance of power results in the birth of an authoritarian political class which believes that its only object is to beat the people into obedience. And the best way for an authoritarian regime to ensure that it is obeyed is to instil fear into the minds of the people.

The recent turn of events including the government response to them (including Anna, Ramdev, etc.) clearly show that the Indian Parliament has turned into a den of authoritarian politicians who have no respect for the opinion of the very people whom they are supposed to represent.

What is most amazing in this transformation is that how could the politicians think that they would get away? It is sociological law that the more information you give people, the more government policy becomes dependent on public opinion. Perhaps this may be pitching it a bit too far, but this is good generalisation.  With so much of free flow of information in the country, the politicians should have realised that they have to be more and more responsive to public opinion and there actions would be subjected to even greater public scrutiny. Unfortunately the Indian politicians thought that policy formulation can be done without considering public opinion and in total disregard of the sociological law. As a result of this, the people of India have taken it upon themselves to formulate the policy and force their representatives to enact it into law. In a democracy, public opinion has to find place in policy making, either through the peoples’ representatives or directly as is now being done in India.

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People power

August 17th, 2011

Who would have thought a few months ago, that Hosni Mubarak, the man who ruled Egypt with an iron fist for 20 long years, would one day stand trial in the very country he ruled? But that is exactly what is happening today. The ailing dictator, who was stripped of his powers following a people’s revolution early this year, has been made to attend the proceedings on a stretcher with life-support machines strapped all around. There was a time his country and Hosni Mubarak were regarded as synonmys. Few could have dreamt of an Egypt without the despot. Somewhere down the line, though, Mubarak took his position for granted and forgot that there is something known as ‘people power’. January 2011 demonstrated what this power is all about. And, from then on, a large part of the globe has been getting a taste of this power.

Failure of governance over a sustained period of time is one of the biggest unifying influences over the people. The mind of a thinking human being protests over the failure of governance and, when his protests are not heard, his mind starts to oscillate between murderous and suicidal tendencies – murder the people in charge of governance or commit suicide since bearing failure is no longer possible. The main reason for these tendencies to find place in the mind are generally the brutal use of law enforcement agencies to curb any form of peaceful protest against governance.

Egypt is a classical example of this mindset. People got together — first in a mood to protest in a peaceful manner. The establishment, oblivious to the concept of people power, responded with a heavy hand. People Power got invigorated and converted the peaceful protests into violent ones. The establishment now had a justified reason to use force and thought it could quell the ‘uprising’. Unfortunately, when the only alternative to murder is suicide, people will always give murder a good try before settling for suicide. Obviously the establishment in Egypt realised this and buckled to people power, but only after a lot of collateral damage to life and property.

India is a little different – it is a democracy where the freedom of the people is supreme. Freedom represents the wide range of responses — from any kind of legal behaviour to the practical freedoms of the press and media. It represents choice –– choice to one form of behaviour or another, for the governance or against. The use of law enforcing agencies to curb freedom of any form is considered totally unacceptable in any democracy.

In the above backdrop, the turn of events in India becomes very scary. The government has taken a tough stand and Team Anna has replied with ‘people power’. In fact, global events show that it is always the latter which emerges victorious, but that has a huge cost. The government should immediately convert its confrontationist attitude into one of consensus through continuous dialogue. People power has little patience and understands no reason. It takes little time for this power to be converted into ‘mob fury’ a conversion which needs to be stalled at all costs.

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