Archive for the ‘Economics’ Category

Gamestop is the endgame of net-fueled demonetization

January 28, 2021

As an ‘early millennial’, I heard the sermon about markets a zillion times during my teenage and adolescent years. The sermon where they said the fundamentals were great, the markets would take care of themselves and that regulation was anathema.

There was nothing Wall Street hated more than regulation. Even the 2008 meltdown led not to self reflection but to frenzied attempts to lobby the new Obama-led administration to not inflict regulatory ‘harm’ on Wall Street. Attempts which largely worked in spite of the populist movement Occupy Wall Street. And yet Dem supporters wonder why their party bled House and Senate majorities during the Obama years…

But I classified this write up under economics and not politics so the objective is not to indulge in bipartisan bashing of politicians. That’s so boring and so 2020.

I want to talk, instead, about the most exciting bit of news I have heard in a long, long time. That is, of a bunch of Redditors ganging up to make the stock of the ailing company Gamestop soar, not just frustrating hedge funds attempting to short sell the stock but pushing one of them, namely Melvin Capital, to the brink of bankruptcy. If you truly are out of the loop about this, you can read here. Or watch here.

The popular narrative about this is of internet successfully trolling Wall Street fat cats or the more romantic notion of stealing from the rich to give it to the poor.

But Gamestop-gate also represents the endgame of a game propelled by big tech for a long, long time and one that Wall Street endorsed right until now – that of demonetization.

This is not demonetization in the sense we Indians understand it thanks to what our Supreme Leader did back in 2016.

In this context, demonetization literally means destroying the monetary value of a service. Now…that service could be producing and selling a music album, publishing a book, booking a cab and so on. They don’t call it demonetization, at least not most of the time. They call it disintermediation and that makes it much more popular with the customers.

They purport to eliminate the middle man from all these transactions (also including other things like flight booking) to deliver convenience and economy to you – the customer. The problems with this argument are two fold. One, in a service-led economy, a lot of our work is indeed facilitating a service by being a middleman (or working for one). So…you may enjoy this consumer utopia right up to the point your own industry gets disintermediated out of existence. Two, if a multitude of small intermediaries are collectively replaced by one or two or at the most a handful of tech oligarchs, it is not clear that this will continue to benefit the customer long term.

There is a third problem too. It may or may not be a problem depending on how you see it but this is where the force of demonetization is most potent. This process of demonetization is thus far biased in favour of customers at the expense of producers. But it also democratizes the playing field for producers. So…if you are a budding musician, you can today reach out to listeners worldwide by putting up your work on Youtube, Facebook or Spotify. Your monetary potential out of said reaching out is also, however, limited. And there aren’t very many ‘record labels’ left to dole out fat advances to musicians (except a small club of popstars).

I intentionally put record label in quotes. You see, the record, notwithstanding small scale nostalgia for vinyls, as your means of acquiring music died out a long time. It was killed through piracy, by illegally uploading an artist’s work for free on the internet for anybody to download. Whenever Google or the file sharing services like Rapidshare were asked about it, they expressed helplessness and said they had no control over what people uploaded.

Frustrated, the RIAA made attempts to get Congress to pass legislation that would bring Google and others under greater regulation. It almost passed in Congress…until Google asked lawmakers to imagine a life without Google. This would not be the last time. Recently, they similarly arm twisted Australia with the threat of deactivating the search engine for Australia.

The lawmakers predictably caved in. And in that period, the music industry bled some more and by the time streaming services took over, CDs were nearly dead. That is, an album by itself was worth nothing beyond pennies at best. As I said, the potential reward for an album that sold a lot of copies (or got listened to by lots of people) shrunk dramatically. But this was justified as for the greater good of the consumer and musicians be damned!

The same happened with albeit less detrimental consequences in publishing. You can now self publish your work effortlessly. But the fact that you can means traditional publishers are struggling. Big ticket consolidation is already underway in publishing as the only means to survive Amazon. Again, I could publish something, get a few people to read it and feel good about it but that’s mostly as far as it goes. Big advances for star writers are increasingly a thing of the past.

I do not think it is entirely a coincidence that the art world bore the brunt of this disintermediation attack. If you subscribe to Horseshoe Theory of ideologies, you already know that the Far Right and the Far Left often mirror each other in terms of tactics (eg. preferring utter conquest and subjugation to consensus or compromise). Likewise, the uber capitalists share Marxists’ disdain for art. For Marxists, art is airy fairy and lacks the glory of hard labour. For uber capitalists, art is airy fairy and cannot match the high of making money. So… if artists are now struggling, who cares. Maybe they should get themselves a CS degree before it’s too late to sign up to work for a hot tech start up ASAP, right? Newsflash: That’s what many musicians already do, or some version of it.

Anyway, moving on. ‘Demonetization’ has killed music stores and CDs, bookstores and is increasingly imperiling the existence of supermarkets as well. After all, the reason Gamestop was seen as ripe for a mother of all short sells was its business model consisted of offering videogames at malls. Even restaurants aren’t completely free; friends from Bangalore say they dine out a lot less because they order from Zomato. See! So it’s conceivable that an upscale restaurant could shut down because somebody running a home kitchen sells good enough food at a much lower price!

The point I am making is, yes, you CAN have everything conveniently at home and for free or almost for free. But what remains then of social life if there are no bookstores or music shops to go to to hunt for your favourites, no malls to hang out at, no restaurants to have a good time with friends? So far, museums and clubs are impervious to the threat of demonetization but a few more pandemics should do the trick. Note that I don’t advocate one way or the other about this; rather, I am trying to ask the question. I am alarmed, on the other hand, that we are so much in thrall of capitalism that we self-censor ourselves and do not even ask these questions. I mean, do you really think your beloved billionaires are so vulnerable that having a free wheeling discussion about this would somehow imperil them?

So why were the billionaires happy with this arrangement? Because they were making billions more on Wall Street, dummy. Even as the pandemic raged on, they continued to make money on the stock market unabated. It was all good…until Gamestop-Reddit happened.

Now, after all these years, Wall Street is actually talking about the need for, um, regulation. Yes! Not multiple stock market crashes, not the GFC, all it took was a bunch of Reddit nerds beating short sellers at their own game. Suddenly, they feel threatened by these invisible enemies; suddenly, they know what Lars Ulrich felt like about Napster back in 2000.

Too late, the genie is out of the bottle and has been for a long time. If some suits lose their cushy jobs in the ensuing democratization of Wall Street, it wouldn’t be a moment too soon. Wall Street has enthusiastically cheered on the creation of a tech led utopia that would literally represent the ‘End of Work‘ – because there would be no jobs! It’s about time they got a good taste of what this utopia looks like too and I do sincerely hope they like it, nay, love it. Come on, man, markets can take care of themselves. That’s what you told me!

Statutory warning: Gurunomics is dangerous for mental and economic health

November 18, 2018

The day S Gurumurthy, Chennai based chartered accountant and right wing ideologue, was inducted as a board member of the RBI, you could see trouble brewing from miles away.  The renowned economist Jagdish Bhagwati famously said that if Gurumurthy is an economist, then he (Bhagwati) must be a Bharatanatyam dancer.  I am no fan of Bhagwati but in this instance, I have to agree.

Now is not the time, though, for pithy asides because the trouble that was once merely brewing has now acquired the proportions of a shitstorm.  For the past couple of weeks, an unseemly back and forth has ensued between the RBI and the Central Govt with the latter demanding that RBI part with their reserves which the Govt slyly continues to present as the demonetisation dividend.  This, in spite of RBI’s statement confirming 99% plus what-have-you-decimal points of old currency notes had been successfully lodged with the banks by the people, whether these pertained legitimate earnings or black money.  In other words, the black money is now officially white.  But that again is a subject for another day.

Having first frayed tempers, provoking an unusually candid riposte from Deputy RBI governor Viral Acharya, the govt sought to make conciliatory noises and cool the temperature, lest the remaining FII money also escaped India’s stock markets.  But as 19th November, the day the RBI Board is set to meet again, approaches, Finance Minister Arun Jaitley has once again urged the RBI to ensure liquidity.  In other words, if you won’t part with reserve, bring down the interest rate (thus, printing notes through the backdoor).  S Gurumurthy, ostensibly the chief architect of the note printing idea (and also a supporter of demonetisation, if I may add), has also given a lengthy speech at the Vivekananda International Speech.  Without saying that that’s his intent, he attempts to drum up support with the public for this note printing idea.


For the reason only that Gurumurthy’s words have now unfortunately acquired national importance, I sat through his speech on Youtube.  Trust me – and this has nothing to do with ideological differences – it is a difficult listen because, intentionally or otherwise, Gurumurthy refuses to present Gurunomics in a concise and crisp format.  Instead, he chooses to waste a lot of time talking about the decline of Indian civilisation, our lack of confidence in our own ideas and the attendant need for approval from international agencies established by the Western hegemony, about how experts got Trump completely wrong, so on and so forth.  There is also no structure to the talk as he drifts in and out of tangents until the tangents become indistinguishable from the crux.  I am going to say that I think these digressions are intentional because they are designed to mask the lack of substance in his central argument.  The argument being that India should give the IMF & co a wide berth and print notes as that is what everyone is doing.

Now who is this everyone?  Guru mentions USA and Japan as key examples.  Let us pause here.  USA, a country which until 1980 used to be the world’s biggest creditor and which, prior to Reaganomics (the irony), strongly believed in balancing its books.  It did so again at the end of Clinton’s second term by the way.  Why did USA print notes bigtime again?  Because there was no other way to bail itself out of the 2008 meltdown. Europe belatedly followed suit with its own version of Quantitative Easing (which is the technical term used these days for what is essentially note printing/flooding the market with dollars/euros).  Guru also mentions Japan, which is doing so as well under Abenomics.

As said earlier, extraordinary circumstances forced USA and Europe down this road.  Circumstances which caused the interest rate to nearly touch zero in these countries, with, obviously, low to no inflation.  Japan too has had deflation for many years and Shinzo Abe has only been trying to somehow reflate the economy back to life.

Does the Indian economy have comparable circumstances?  The answer is a vehement and unequivocal no.  India has long trended towards moderate to somewhat high inflation, thus forcing the RBI too to keep interest rates high.  It is not that RBI keeps interest rates high ONLY because the world powers say so.  Even if nobody cared what India did about its monetary policy, RBI would have no choice until India fixes its inflation issue.

I could now drift into a tangent about how govt’s own lethargic implementation of infrastructure projects further fuels this inflation.  Instead, I will stick to the argument that we are not in a position to do what USA and Japan do because our economic circumstances are different.  Now I will devote a few sentences to explain what would happen if India indeed printed notes in a big way as Guru suggests.  We have seen this movie before and I will get to it in a bit.

  1. When the govt prints notes, it essentially means money is available more easily and at a cheaper cost to people at large.
  2. What do people do with this easily available money (it’s actually called easy money policy)?  They buy more stuff than before because they have the money to.  More food, more cars, more houses even.
  3. What happens when more money chases the same stuff?  The price of that stuff increases. I.e. inflation.
  4. There’s more.  To compensate for this inflation, manufacturers now have to pay more salary to their staff. That means it now costs more for manufacturers to make the same stuff than it did prior to note printing.
  5. When product ABC is now exported at a cost of say rupees 110 instead of rupees 100, what do you think happens?  People don’t want to buy, simple.
  6. When people don’t want to buy your exports, you lose foreign exchange.  You keep losing until eventually you reach a crisis situation.  Alternatively, you stop defending your currency with the US dollar reserves you have and let it drop.

Folks, as I said, we have seen this movie before.  What is the name of this movie?  It’s called UPA2.  At the behest of both our industrialists rattled by the meltdown as well as Western powers who suggested India and China should pick up the tab while the developed nations fixed their house, the Indian govt followed an easy money policy and also offered tax cuts to industry.  For a few years, all was well as India experienced some of its highest ever GDP growth.  But the consequences of such steroid-fueled growth caught up very quickly with us.  Imports kept going up (obviously as everybody had money to spend and with US weakness, the Indian rupee strengthened) and inflation first crept up and eventually began to soar.  Property prices too soared, eventually reaching unsustainable levels, particularly in Mumbai. There was much outcry too over the soaring prices of vegetables, fruits and foodgrains.  By 2012, the economy seemed to be in disarray.

And then, in 2013, the US Federal Reserve announced it was going to taper off Quantitative Easing.  The mere announcement triggered panic in emerging markets.  Why?  Because tapering meant those easily available dollars were going to go back to US.  The rupee crashed even as D V Subbarao, the weakest of our RBI governors in terms of being unable to resist Central Govt pressure, left office on an unhappy note.  With some out of the box thinking, the UPA govt appointed Raghuram Rajan as the RBI governor in spite of him not previously holding any position with that organisation.  His exemplary forex management arrested the rupee’s slide and, more importantly, cut down volatility sharply. But all that is history as we know RR too had to go and can perhaps guess why.

That brings us to today and to Guru’s speech.  Guru blasts the UPA govt for allowing what he called bogus foreign money to flood the Indian markets.  He is referring to the inflow of QE dollars into India.  It is not clear what India could have done to just stop that money from entering the economy short of following tighter monetary policy which they should have.

But if they ought to have followed tighter monetary policy then, when there was actually a glut of dollars, why exactly does Guru recommend note printing today?  Today when US interest rates have increased and are set to increase and the dollar is going from strength to strength.  Should the RBI cut interest rates now and the govt actually just take RBI reserves and spend it on projects (possibly including but not limited to gigantic statues), there will be a further exodus of dollars from India, pushing us closer, again, to a forex crisis.  Guru praises India and Japan’s currency swap agreement as something we ought to have done long ago.  We have been, actually. The previous arrangement was for a currency swap of $50 billion.  It has now been hiked to $75 billion.  All good. The only problem is our imports from China alone are $68 billion!  Japan is only our 15th largest trading partner.  You can get around the rules of the economic jungle for only so long.

It beats me why, having criticised UPA 2 correctly for pumping up the Indian economy artificially, Guru proposes exactly that as the cure NOW.  Is it yet another attempt to cover up the govt’s colossal failure with the demonetisation experiment?  Or is it in fact, contrary to his pleas for original ‘Indian civilisation’, nothing but a slavish attempt to imitate Japan just because?

However it may be, and I don’t have a CCTV planted in Guru’s mind, the short point is the prescription, if implemented, would be a complete disaster for the economy.  I see, from the Youtube comments, that Guru, though, is winning favour with his talk.  You see, all it takes is for someone to speak with an appearance of confidence, of knowing what he’s talking about.  It doesn’t matter whether he really knows.  We have seen THIS movie(s) too before and they go by the initials of NM or DJT depending on your choice of language. Guru talks a lot of crap in the midst of some valid observations about experts getting predictions wrong or that there is no universal theory of economics.  But it doesn’t SOUND like crap and that’s all that matters.  Poor Urjit Patel’s introverted reticence is no match for Guru’s confident bluster.  It’s Dravid v/s Srikanth and who would you pick as the more confident batsman if you didn’t know their records?

In order, therefore, that the gullible public is not taken in by a mere appearance of authoritative expertise, I posit that every S Gurumurthy speech on economics should be preceded by a statutory warning.  The warning is as follows: Gurunomics is dangerous for mental and economic health.  Enjoy it but do not ingest it.

Triumpian times a nightmare in the making for India

March 12, 2017

In the run up to Donald Trump getting elected as President, one ethnic community/nation that was conspicuously sanguine about the prospect was Indians/India.   The rationale was that India doesn’t depend so heavily on foreign trade as China and has not taken away so many manufacturing jobs from USA.  So Trump’s war will be with China, not India.  A group of US-based Indians even formed a Hindu coalition in his support.  Oh, wait, there was also the hope that Trump would be less pro-Pak than previous US presidents.

As has been the case before, the above showed both a neglect for data, for facts as also a lack of understanding of geo political realities.  When one power decides to take on another, it has to size up how many friends it will have by its side in the fight.  So what happens if USA takes on China?   The EU may turn against USA, for one.  China is EU’s second largest trading partner. behind USA.  USA accounts for 17.5% of EU’s total international trade and China for 14.8%, so the gap is narrow.  Where’s India?  Only 9th, behind Japan, South Korea,  Russia etc.   Heck, even USA’s good friend UK may not go along with an all out trade war on China.  USA Inc may not be comfortable if Trump declares (trade) war on China.   A war on China could plunge USA into majestic isolation and accelerate the transition to the hegemon in waiting, namely, China.

But India?  It’s a very different scenario.  India has a relatively low volume of trade with USA with a disproportionately high surplus.  This is at least partly on account of high import duties (within WTO rules) to push foreign corporations to set up shop in India to at least assemble stuff here.  India is also a major operator in outsourced services, evidenced by the fact that its share of worldwide exports of services is twice that of its share of merchandise exports.  With its growing population and relative proficiency in English (compared to China or other East Asian tigers), India presents a greater threat to service jobs in USA.

So here’s what Trump CAN do (and he dropped a hint with his reference to Harley Davidson): either launch an assault on India’s high import duties and make India curtail outsourcing in exchange for maintaining these barriers to merchandise trade.  OR strike outsourcing and push India to drop import duties in return for continuing to provide services at the expense of American employees.

MY guess (and I could be wrong) is he is more likely to do the latter.  After all, where will service sector jobs in say IT or accounting return to?  Places like NYC, San Francisco or Seattle which are in states that roundly rejected Trump and will likely do so again in 2020.  But if Trump can get countries (including India) to lower trade barriers and simultaneously compel American companies to make in USA, the Rust Belt, which swung in his favour last year, will be delighted. Basically, easy reaping of political capital for Trump with relatively low risk.  It will be a terrible waste of Modi’s zillion cries of Make in India but he would probably also prefer to keep high paying service sector jobs in exchange for putting India’s manufacturing sector under greater stress.  He might also reason that USA does not have products tailored for the high volume segments in India.  Whether this will be the case remains to be seen.

Be that as it may, it behooves the GoI to think seriously about what Trump could do to India (rather than for India as Indians allowed themselves/ourselves to believe) and act decisively to protect our position.  The Budget, made in the knowledge that USA could deliver the bazooka of a sharp cut in corporate tax, did not seem to acknowledge this reality and indicated a preference for business-as-usual.  But going beyond economics, India also urgently needs to mend fences with China, its 800 pound gorilla of a neighbour, and Russia, once its good friend and now aligning with Pakistan, a nation that helped topple the Soviet Union.  Failing that, a bear hug with Trump and roll out the red carpet for the Trump Organisation (you know what I mean).

But something needs to be done and something needs to change, that much is for sure.  It is understandable that the ruling party would presently be punch drunk with the stupendous results in the UP elections.  But if Ramraj is not to end up becoming a laughable and sad parody for social media memes, then India must formulate a pragmatic and realistic strategy to handle the gigantic disruptions that may be coming our way in the Trump era.

PS:  Why do I think Trump won’t risk majestic isolation in taking on China?  Because he is a populist and badly needs the love and affection of his core constituency.  India’s prospects, on the other hand, were better under Bush Jr and Obama, who tried to make India a counterweight. Yes, Trump loves Hindus, because we are as easily flattered and more easily deceived.


Brexit: Britons call the bluff on clueless media

June 26, 2016

The mood before the Brexit in the media as well as the stock markets was one of cautious optimism.  Yes, the referendum was predicted to be close but surely, surely, voters would exercise the sensible, prudent option.  Tried and tested.  After all, who wanted another 2008, right?

In this general vein, CNBC TV18’s Lata Venkatesh made an observation that apocalypse is not a frequent occurrence in the markets and the last such was 2008.  Usually, and she cited the example of the Grexit that wasn’t, politicians got together to resolve a crisis in the eleventh hour.

There was something in that statement that convinced me to expect a Brexit when results would be declared on Friday and to pull out equity holdings in advance.  Let me  break it down now:

  1.  Yes, politicians may resolve a crisis at the brink but there is little they can do in a referendum.  So, no, Brexit had the potential to be yet another apocalypse.  Just as US govt erred in letting the Lehman Bros fail, British Prime Minister David Cameron had already erred in agreeing to a referendum and thus leaving himself at the mercy of events he could not control.
  2. The cautious optimism belied a lack of understanding of how voter turnout works.  I can excuse Western observers not used to the chaos of multi party democracy and gatbandhan politics that we Indians revel in but Indian journalists, including ones who sport fake American accents, should surely have been more clued in.  The point is this: only low turnout in England (outside London, that is) could have saved the Remain campaign.  High turnout would indicate that people who wanted out of the EU had turned up to vote.  Just as how high voter turnout usually, though not always, indicates anti incumbency in Indian elections.  Expecting people to turn out in large numbers to preserve status quo reveals either a lack of understanding of how voters behave or an overestimation of the benefits of EU to the UK.
  3. Grexit did not trigger a crisis in the markets because Greece was mouselike in its haplessness against the might of the European Commission-IMF-ECB troika. Brexit was a whole other matter and the third largest economy leaving the EU would be disastrous news for the EU, firstly, and, secondly, possibly trigger an exodus of other nations disgruntled with the management style of the EU.

I’ll address the last point in a bit.  But before that, let this be a lesson with regard to the media’s behaviour.  When they all display rare unanimity on an event that is in fact uncertain and ambiguous, they are very likely to be dead wrong.  Further, people in the media have a terrible habit of opining on everything so make sure you know what their speciality is and disregard their advice on other matters.  Yes, I am referring to the apparently reliable and erudite Lata Venkatesh here.  Listen when she’s talking about Indian monetary policy or breaking down the IIP.  But she’s no psephologist and she just proved it in the run up to the Brexit.  I have nothing against opinions per se.  People may air their opinions freely except that when appearing on TV, they ought to couch it with a suitable disclaimer to take it with a pinch of salt where it does not pertain to their field of expertise.

Now, as to the management style of the EU, which is my lengthy post script.  What would you do if you lost a long time and valued customer?  You would of course do your best to persuade him/her not to end the relationship.  If he/she was hellbent on a break up, you would respect the decision and agree to be friendly in parting.  If you instead badmouthed your customer for leaving, wouldn’t you expect to be fired by your boss?  Apparently Wolfgang Schauble, Finance Minister of Germany, doesn’t think so.  He didn’t lose the opportunity to rebuke Britain, a democratic nation, for exercising its choice and warned of taking tough action as a deterrent to other EU nations against choosing to leave the EU.

Excuse me, but Britain have the right to choose to end a relationship.  A Brexit in this case does not amount to a Greece-style default.  In fact, by threatening to punish Britain for merely exercising their free will, Schauble only lives up to the common complaint against EU made by Euroskeptics: that the EU is undemocratic.  The common sense thing to do here would be to learn a lesson from this debacle, make the divorce with Britain smooth and painless for all concerned and reach out to other nations and listen to their problems so that the EU doesn’t break up.  But then, whoever accused economists of possessing that elusive thing called common sense! I wouldn’t bet against this being the beginning of the end of the EU though it would be a sad day when that happens.




The war on inflation-targeting

February 7, 2016

Ever since RBI announced the intention of installing an inflation-targeting framework, there has been a regular supply of articles criticising this move, arguing at once, that inflation targeting does not work in Indian conditions and, that it has failed in developed nations (where demand was saturated a long time ago).  That is fine; views of every hue should be welcomed.  Of late, though, the supply has positively intensified, to put it mildly, and there is a complete (and curious) lack of articles arguing for the benefits thereof to balance the equation.  I could speculate as to the reasons for this based on what I believe in private but in this defamatory age I would rather not.

Briefly, the arguments go that, as said earlier, inflation targeting has failed in countries that adopted it, that monetary and fiscal policy should go hand in hand and that growth is what India needs at the moment.   All these arguments are fine and dandy but do they not disregard the evidence of what happened in India between 2009-2013?  That is, the last time monetary and fiscal policy worked ‘in tandem’?

What is this working in tandem business such columnists refer to anyway but a euphemism for saying monetary policy should bow down on both knees to fiscal policy…and restart the printing press?  By all means, monetary and fiscal policy should go together and the RBI governor does not seem to be saying anything different.  Yes, fiscal policy should support monetary policy in the mission of bringing down inflation in a long lasting manner…by implementing necessary supply side reforms.  Asking the central bank to toe the line of government in inducing demand when inflation hasn’t yet been contained is….well, in that case, you don’t need an academic to head RBI and any meek public servant who can be threatened with suspension of his pension dues will do!

But coming back to the lessons of 2009-2013, what happened is govt decided to ignore fiscal consolidation ‘temporarily’ to revive the economy….at the behest of industry.  RBI followed suit by following an easy money policy.  Both the Finance Ministry and the RBI stayed the course way too long in this instance until inflation spun out of control.  To remind the pro-growth lobby of the facts, WPI inflation, which is today in negative territory, hovered in double digits through 2011-12!  It was in early 2011 that RBI finally seemed to ignore pressure from the growth lobby and doubled down on inflation.  But it was too late to contain the damage by then.

The other problem caused by the easy money policy was to create growth out of thin air, a govt spending induced bubble which burst the moment RBI tightened the screws (and Fin Min, with Chidambaram taking over again, too resumed consolidation).  Industry, which directly or indirectly bemoaned tight policy then and now, paid a heavy price as the capacity they installed to meet high demand during 2009-10 was laid to waste and remains unutilised or underutilised to date.  As somebody who works in the auto sector, I know this all too well and the situation is much worse in sectors like steel where there is a global glut.

There is no point in crying over spilt milk.  The mistakes of 2009-2012 are in the past and India will have to live with their consequences.  But the least we can do is learn from them and not repeat them.  It is way too soon to be clamouring for a demand injection to spur growth.  Households are just about beginning to recover from the battering they faced in the high inflation years, particularly post 2012 when inflation remained high but growth, and hand in hand salary raises, slowed down.  The repairing of the economy is not over.

If at all you should clamour over something, it is the pace of the repair job being undertaken by the govt (as distinguished from the narrow monetary policy remit of the RBI).  Urge govt to hurry up and get done with the plumbing.  But urging RBI to repeat the mistakes of 2009-12 is intellectual dishonesty of blatant levels.  You could cite any number of studies or theories to serve your anti-RBI conclusions.

Or you could just step out and check the prices of everyday essentials.  Yeah…you know where the truth lies.  Inflation targeting may not be the panacea it is seen as by some folks, but it happens to be the need of the hour in a country that has suffered high inflation for the last few years, a country where govts are given to fiscal profligacy, a country where revenue generation is just not enough to finance govt expenditure and finally a country where wasteful govt spend is justified under populist pretexts.  To quote Barry Goldwater, “In your heart, you know he’s right.”


The need to differentiate cronyism from libertarianism

May 28, 2015

Recently, Algeria made airbags compulsory in all cars imported into the country.  Algeria is an attractive market for automobile OEMs, many of whom have manufacturing operations in India.  Predictably, the big daddies of auto inc have made visits to Algeria (and possibly the govt of India) to see if something can be done about a rule that would improve safety of passengers.  India is also expected to make airbags compulsory with the pending Motor Vehicles Act, presently stuck in Parliamentary logjam.  Wonder whether suits and boots have made advances to the opposition.

However, the point of bringing this up (the fact that Algeria has legislated more advanced road safety norms than India) is to contrast it with a popular example cited by libertarians.  The seat belt example is one of the absolute favourites of libertarians.  They ask what business does govt have to make it mandatory for cars to offer seat belts?  They opine that manufacturers should be allowed to offer cars without seat belts, thereby bringing down their cost, and let customers choose if they wish to pay more rather than ‘force’ features onto them which they don’t ‘need’.  By this standpoint, India must be some sort of a libertarian paradise because standards and norms are lax even in theory and very poorly enforced in practice, leading to a laissez faire system (again, in practice).

Except, India, most emphatically, is not a libertarian paradise.  Rather, its system is loaded in favour of cronies with deep pockets and against individual citizens of limited means.  So how does this work?  Basically, by means of stiff entry barriers combined with a lax operating environment that awaits the privileged ones who manage entry.  In a way, the state of things in higher education in engineering and medicine mirrors the Indian economy.  Very tough to get in without ensuring a commensurate standard of proficiency in the professionals it turns…or quality of produce in the case of the economy.

Through a combination of ambiguous laws with a frequently verbose, archaic turn of phrase and a corrupt bureaucracy, especially at lower levels of the chain, India makes it expensive to set up shop and obtain the requisite permissions.  Once you get in, though, it willingly turns a blind eye to your activities…that is, as long as you do what is necessary to remain in their good books.  An example of how this too is loaded in favour of the fat suits and boots is that a small time hawker running his operations without a licence can lose his equipment if he does not cough up the ‘rent’ in time but a certain well-decorated entrepreneur evades responsibility after failing to repay loans due to banks from some of his troubled enterprises. The latter can enlist the help of lawyers and accountants to arrange his affairs such that he can, in effect, legally get away with murder but the former pays a heavy price for a crime that ultimately causes little harm to anyone apart from worsening traffic congestion and overall hygiene in the city.

Thus, the seat belt example only resonates in an environment where optimal conditions for the starting and shutting of business activity as well as efficient and effective procedures and law enforcement already exist.  Like the United States or Singapore, perhaps.  And these economies see fit to enforce certain regulations to ensure a minimum quality of life for their citizens.  What, then, is a more practical test of market liberalisation in an economy (a pre-requisite for libertarian conditions) is, simply, the ease and efficiency of doing business in an economy.  Regulations that tell you what you can and cannot do do not by themselves make it tough to do business, contrary to the libertarian view, as long as said regulations are transparent and unambiguous.  What does make life tough for a businessman is having to contend with an army of hungry bureaucrats who can interpret the rulebook in a million ways to get you.  I remember a relative’s car attracting the attention of the traffic cop not because the driver had oversped or jumped signals, but because the quality of the number plate was allegedly suspect (emphasis on allegedly).  There you go.

Prime Minister Narendra Modi is spot on in saying that doing business should be made easier for aam aadmi (common man) too and not just Ambani.  That is indeed what market liberalisation is all about.  It remains to be seen whether that, though, is indeed what the BJP will actually execute over the next four years of their term in office. Whether they do so or not would depend on an appropriate understanding of liberalisation and, specifically, ease of doing business.  Hand in hand, libertarians ought to dream up better examples to communicate their ideology to those not already converted.

Keynesianism in action ….in a housing society budget!

August 15, 2014

The influential English Conservative politician and three time Prime Minister Margaret Thatcher often used the example of a household budget to impress the virtues of fiscal conservatism.  She said (not in as many words so bear with me as I paraphrase) would you not want to live within your means if it was a question of your own household budget.  Would you not want to ensure that you do not spend in excess of what you earn for the sake of sustenance.  

Today I had the opportunity to test this comparison as I attended the annual general meeting of my housing society.  For the uninitiated, there’s a Societies Act governing residential apartment complexes in India so they have to go about managing the upkeep of the society within a certain statutory structure.  

Anyway, the meeting commenced and the Treasurer was asked to present the Annual Financials to the members.  He opened with the announcement that in the financial year gone by, the society had made a grand…deficit!  And it was not a modest deficit by any means.  It amounted to nearly 15% of income.  That’s big enough (in percentage terms) to dwarf some of the more profligate state govts in India.  Good start!

The discussion progressed, as most as such meetings do, in the direction of a plethora of grievances and suggestions voiced by the members present. Most, if not all, such suggestions would require money to implement.  The Secretary kept penning the Minutes away, eventually running up a pretty impressive list of targets to pursue in the year to come.  

When time came to consider the issue of the deficit and an increase in society membership charges to manage the deficit, there were a couple of reluctant voices and those in assent remained silent.  In fairness, this is one of the more disciplined societies and members were sympathetic and trusting of the Managing Committee’s intentions in trying to do their best.   And those members who grumbled about the proposed hike also sought compression of existing routine expenses and volunteered to help the Committee bring down expenses by way of payments to contractors for say lift maintenance or water tank cleaning.  

However, the end result was the question of whether to hike and by how much was left unanswered.  A provision for a hike, if necessary, was recorded.  In the meantime, the society was to do what they could to reduce expenses and see how far they succeeded in this effort.  But this meant the deficit situation would have to continue in the interim and society was losing money that could be invested in a fixed deposit to at least make up for inflation.  Two behavioural aspects that were most interesting to observe were (a) the scant discussion on the income side of the financials and (b) the reluctance to pay what is necessary to avail of a certain service and preference to postpone payment of the same.  For instance, it was suggested that in the interim, the society chase large sums outstanding from some members to implement some of the grand works that were proposed  in the meeting rather than approach all members to pay a pro rata charge.  Of course the members would pay, but later on; in the meantime the society would somehow juggle finances to manage the situation.  

In this unique situation, it probably worked in their favour.  A society is after all not run to make a profit but only to ensure maintenance of the housing complex so collecting only as much money from members as is required will suffice.  However, extrapolating such an approach to a macroeconomic level is a different ballgame altogether.  The stakes are lower in a housing society and if a deficit pushes the society to a cash crunch, it can quickly recover the situation by urging members to pay up some more money.  However, a government resolves a similar issue (like, say, a balance of payments crisis originating from a large fiscal deficit) by debasing its currency (either directly or by simply artificially expanding the supply of money).  And debasing the currency reduces the future value of payments you have provided today to make.  

Let me illustrate.  In the above example of the society, in an inflationary economy, the member saves money for himself by postponing the timing of the payment of the charge required.  A thousand rupees tomorrow is worth less than a thousand today.  Of course, this is not without its long run consequences.  The society receives the money later than it normally would have in which case it’s already worth less than today.  This means that other things remaining the same, the deficit next year would only be even higher than the current!!  And unfortunately for Keynes who said that in the long run we are all dead, this is not long run enough for the parties guilty of postponement to escape its consequences.  

Nevertheless, the above suggests that perhaps Keynesianism is in fact quite firmly embedded in the way households manage their affairs, contrary to what conservatives may believe.  And the key behavioural aspect driving this is, as I said, the reluctance to pay today for a service you have received.  







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