Friday, July 26, 2013

India's growth story has lessons to learn

India’s growth story has lessons to learn:

The most vocal protagonist of India’s growth and the architect of planning in India during the current UPA regime Monteksingh Ahuluwalia conceded that the expected growth would not reach for the current fiscal. Quickly following, at ASSOCHAM the Prime Minister Manmohan Singh conceded that all is not well with the economy and India’s current growth is a serious concern.
The Reserve Bank of India, country’s central bank has been consistently downplaying the growth story due to uncertainties in the farm and manufacturing sector and the adverse influence of the overall global slowdown. But is that all? IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent. Should China’s slowing growth be a concern for us akin to a boy getting 10 percent comparing with another getting only 2 percent and feel satisfied?
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. We should do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices.
Post-liberalisation trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies. Now after averaging to 8.5 percent growth in the five years 2004-09, the next five years have been witnessing year after year the slowing down.
Even to stay where we are in growth trajectory, we need multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive. Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. Several developed countries with US no exception sail in the same boat. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. This is not to say that we have no options but to draw consolation. I would not like to sound pessimistic but would like to caution on the realities to move to sustainable development that depends inherently on our culture both social and economic.
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions that needed to be guarded against. High salaries at the start of the careers before the earners could know the value of the rupee led to squandering the resources through lavish living, pubs and clubs. If the technological advantage should continue there should be stable structures and adequate and timely incentives as substitutes for resource degeneration could result in regeneration and welfare all round. Growth sans happiness leaves the economy in the hands of touts and terrorists that every citizen has a responsibility to prevent.

If demographic dividend that we are likely to have till at least 2025 should give the advantage, we should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. We have to learn the lessons of growth, even if they are the hard way. 

Tuesday, July 23, 2013

Shri M. Ramakrishnaiah is no more - a tribute

Shri M. Ramakrishnaaiah, a retired Chief Secretary to Government of Orissa was the founder Chairman of NABARD and former Dy. Governor of RBI.
An intellectual with compassion for the poor he always believed that the country needs to grow with savings and the right institution to reach the poor is cooperatives in villages that are democratically run and owned by them. It is a great loss to all those who know Shri M. Ramakrishnaiah, the man with a vision who shaped NABARD in the first few years. He chaired the Committee set up to review cooperative legislation when N.T. Rama Rao was Chief Minister of Andhra Pradesh and was instrumental in formulating the first liberal Act on Cooperatives - Mutually Aided Coop Societies Act that is now a parallel Act in nine States of the country and on its foundations the 97th Constitution Amendment Act 2011 has been formulated. An ardent believer in the capabilities of Cooperative system as a saviour of the country sans the political seize it currently holds. 

Saturday, July 13, 2013

Time we return to 'Austerity led Growth'

The Governor, RBI in a recent address pleaded for austerity led growth. Culturally we were aligned to austerity led growth. But post liberalization, we embraced consumption led growth. It had its virtues in seeing that we tasted the western riches; we embraced even their culture in welcoming pubs and casinos. We thought we would move to export led growth. Manufacturing sector could not match up to the task not because we lacked intellect and strategy but because our technologies continue to be outmoded and the needed investments were hindered a the right time through untimely and inaccurate policies. When speed was the essence we moved slow and when we have to move slow we are now wanting to move with speed.

Indian economy continues to be agrarian though the share of agriculture is now at around 15% of GDP. The growth in services sector is the benefit we got out of liberalization during the last two decades and odd but its unsustainability stares at us in the wake of pull down in manufacturing sector. Our imports continued to surge and exports drag their feet. CAD continues to rise and is causing ripples in the economy. Our priorities in investments changed without simultaneously putting in place the needed regulations. When scams after scams occurred and when we realized that the real estate sector, the growth trigger is also responsible for a steep rise in misdirected investments and black money the regulations started moving into the needed directions and for implementing the new regulations the bureaucracy is ill equipped at the moment.

We have also misplaced our direction in education and health sectors aping the west. We have to make these two sectors within the easy reach of the poor and unreached. The real inclusive growth would occur when this happens. Therefore, the whole of Government spending has to have increasing proportions in these two areas and we should move to strengthening regulation and governance structures more responsible, responsive and accountable in these two sectors. The primary and secondary education should be the concern of the government accompanied by all the needed incentives to prevent child labor, migration from rural to urban areas and education to move with culture that is strength of India. The teacher training has to upfront move in those directions so that the teachers find environment conducive for growth in such a situation. We have to realize and recognize that the growth that we attained has become unsustainable because of certain inherent policy misdirection that needed correction.

While seeing the writing on the wall is important, we have to decide on the policy front that it would be advantageous to move in the direction where we emerge as future leaders of the world both economically and culturally. Healthy regulations and rigorous implementation of such regulation through accountability and transparency are important at the moment. Let us move along. We have the advantage of being the youngest nation of the world and the youth needs the right direction, incentive and investments. Let us put them in place. We would be a great nation and India would be truly  the nation that the world of future would look to.

Thursday, July 11, 2013

Markets only misbehave

Markets only misbehave
The other day I was at Niagara Falls. I found at least six tall men of seven feet and a little over and more than twelve to fifteen women of three and half feet width ( no accurate measurement but near approximation of a statistician) in a visitor crowd of over fifty thousand on that sunny day. As a traveler from India, such proportion of odd dimension figures is a rarity. Their food intake would certainly be more than the average person. Wealth follows a fat distribution meaning thereby that there are disproportionately more very rich people than there are, say, very tall people. The reasons are not hard to find why. Wealth has a tendency to gravitate to the wealthy through self-reinforcing mechanism; the more you have of it, the more you acquire. The fat tails of the bell curve of markets oft referred to as Gaussian distribution based on fractals may imply a similar thing: the more they trend in one direction, the more, the trend persists.

I distinctly recall the Economist survey of ‘The Frontiers of Finance’ published nearly two decades ago wherein some such arguments led to three hypotheses: (1) it undermines efficient markets theory – Mrs. Joan Robinson long before emphatically proved that markets are imperfect; (2) it rocks the capital-asset pricing model because that model depends on something called standard deviation as a measure of risks; and (3) it reveals that something is causing the stock market to be predictable. (The Economist: A Survey of the Frontiers of Finance, October 9th 1993). The arguments are used to prove that computerized models are leading to market predictions of a different genre on the basis of a set of non-linearity (“Non-linearity simply means that effect is not proportional to cause”). Non-linear statistics is nothing but a child of the computer. Financial engineers emerged on the scene to produce derivatives of student loans that generate more non-performing assets quickly, mortgage loans where the underlying assets had no value over the time due to fall in rentals and excessive initial rating of such assets ( the sub-prime loans) that led to the great recession of 2007 engulfing the whole world. The trends have time dimension and the time zones differ across the world. Prediction based on the trend obtaining in the US markets can provide useful information to those working in Asian markets and such information gets traded more than the data and the multi-national companies stocks behave differently across the markets providing incentive or otherwise for the investors. It is not as though that the GARCH theory (Generalised Auto-Regressive Conditional Heteroskedacity) which simply means that the volatility is clustered. Believers in this theory straddled securities. In the late 1990s this theory went out of fashion due to embedding time in the computer driven models.

The predictability of markets is like the prediction of the almanac pundits of South India at the beginning of the year when the Chief Minister and opposition leader listen to the sweet prediction of their preferred persons who predict their win and they do win. But only one of the parties they belonged to pick up the majority to stay in power for the next five years. There are pre-election soothsayers on the TV channels whose predictions are based on a survey of the miniscule of the electorate and yet their prediction comes to close to the actual outcome. These are based on computer manipulations.

The markets are volatile in nature and the computers predict based on the manipulations of data that the operator ingeniously does. Very many lose in the market and few only gain like those playing in the Casino. The investors of Casino never lose while most players lose. The few winners are like the broking firms who never lose. The investors employ jobbers who manipulate the prices during the day.
How else do you describe the movement of prices of stocks that move up in anticipation of the budget announcement of the Finance Minister and as he starts reading the budget speech, the stock prices keep oscillating with the up-end averages moving south or north and at the end of the speech, one may find a huge drop in the stock index. Actually, no trading might take place but the prices move. Similarly when there is a statement by the Governor of the central bank that inflation decline is still to be reliable a couple of days before the announcement of the mid-quarter monetary policy, the prices of stocks rise or drop.

All this only demonstrate that the markets only misbehave and not behave as you wish them to be. It is after all the individuals who play on the computers dexterously to make the prices look what the powerful investors like them to be. Changes in the balance sheets of firms like the Wipro, Infosys, Tatas, Reliance etc., when released affect the prices of stock index. The Index bases built by S&P based on fractal and chaos theories have descended on markets and instruments based on such indices also entered the markets. Whether these are signs of growth of the markets or the economy is a big question as it is the few wealthy that determine them and minority shareholders whose numbers may be large would have little voice in making or breaking the volatility.  The trade risks are no better than the weather risks. 

Monday, July 8, 2013

Corporate Governance

Kumar Mangalam Birla is on the Board of RBI at the time of applying for a license to open a bank under the new licensing policy. He was the Chairman of the Committee that worked on Corporate Governance for SEBI and the same was adopted by SEBI. He should have practiced what he preached by stepping down from the Board on the day of signing the application for license. 

Calgary, nay Coolgary!

Calgary, nay Coolgary!

Lush green lawns front-end most houses
Flush out discomforting mind
Fresh thoughts walk into the doors of happiness
Moved out in hot Sun
Trapped in the drizzle midway
Drenched in rain reaching the destination
Threatened stampede a damp squib
Fun and frolic rule roost in jostling crowds
Ran into the train to reach back Edge Valley
The gateway to Hampton Heights
Lovely and short journey to become shorter
As Calgary turned Coolgary
La, la, la La Vita: The home of the near and dear.

Saturday, July 6, 2013

VITALINFO: Kaun Banega RBI Governor ?

VITALINFO: Kaun Banega RBI Governor ?
Dr Subba Rao has passed through a critical phase in the economic history of the country with unabated inflation, intransigent and mute fiscal regime, rising CAD and governance deficit. He ran with legs and hands tied with speed that any person would have hardly expected. There are serious undercurrents at reducing the autonomy of the central bank and he may be really wanting to have rest for a while.

Greed untamed builds Casinos and breeds chaos

The huge Casino towers on the Canadian side of Niagara Falls stand tall to assert that the soothsayers have long life to bring seeming riches to some, standing riches to the investors of Casino and catastrophe to millions. Over 66 percent of the Toronto citizens voted against its entry as they are convinced that their hard earned valets vanish in a jiffy and move to unknown territory of unpredictable and unproductive investments.

Real money is being bet on the strength of computers. The mobiles did it all for the betting on IPL in India. Several reputed players stand in the jury box if the investigations go right ere long. All the betting is done on a  series of predictions in simulated situations and several won and most lost. This is just akin to trading on derivatives of sorts that had no originating asset in the pre-crisis 2007.

Human behavior is never consistent. Riches get entrenched in greed. Greed can never be regulated nor can virtue. But the system can halt the greed if rightly regulated. Ethics can tame it. Riches are visible but ethics are invisible though inherent. Every person looks at the visible and goes after it. A 'Narayana Murthy' takes over two decades to build an ethical empire in Infosys for another person to bring it down in three years!

How do we develop consistency in hierarchy and governance? When can we have institutions to have choices instead of individuals to positions that matter for growth of institutions?  When can we have ecstasy instead of agony in choosing persons who refuse to identify themselves with caste, creed or religion, reserved or unreserved category to claim positions of leadership in organisations and governments? When can Indian Constitution that is tethering with more than 100 amendments outpaging the original constitution be re-written to provide the next generation protection of a strong tripod of democracy? These questions do not defy an answer if at all the people are willing to find an answer. It starts with good education and building healthy minds from the childhood.

The problem of excess greed has become universal. Even Mr Carney, while assuming charge as Governor of  central bank of Canada said: " Trust has screached out of the parking lot  with the collapse of the investment bank that left the global financial system teetering." He added: "Integrity cannot be legislated but it also certainly cannot be bought in a market place however free the markets are." A change in culture is individual's responsibility.

The aim of the blog is to set people thinking on these issues and acting in their own limited spheres to bring the needed change in thinking and approaches.