Archive for the ‘Economics’ Category

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.

 

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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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