Alternatively India

Understanding the Future from History

2016-12-20T12:25:00.002+05:30

Note: As a corollary to the post previously written and continuing an effort to understand the current predicament we find ourselves in- I revisited Ray Dalio's (Founder of Bridgewater Associates, the world's largest hedge fund) Economic Principles and the framework espoused therein, to gauge where in the economic cycle we are.

The Ray Dalio Framework

To ascertain where in the economic cycle we are, one must understand the interplay of three concepts (as seen in Figure 1):

Productivity gains- Denoted by Real GDP per Capita, this has more or less seen a linear progression through the last century.
Long term debt cycle- Since the times of Old Testament (which also calls for the need to wipe out debt once every 50 years- better known as Jubilee), cycles of credit creation and bust have persisted in our economy. Credit and spending rises faster than income levels which in turn generates higher incomes and networth through increased aggregate demand. This cycle, however, cannot persist forever and as the cost of servicing the debt rises beyond a certain limit, so does the chance of its default. This pushes the economy through a arduous process of deleveraging before the economy is capable of going back into the consumption phase.
Short term debt cycle- What is commonly known as the business cycle, is primarily controlled by the money supply and velocity in the economy. When rate of spending grows at a faster clip than the economy's ability to produce we witness heightened rates of inflation. To curb this, tighter monetary policies are sanctioned leading to a contraction in the economy. Such recessions end with a reversal in monetary policy in order to stimulate demand, and the cycle replays.

: Figure 1: Interplay of the three concepts

Implications of this Framework

At the very least, viewing the events of this century through the lens of Dalio's framework, exposes the folly of calling the Financial Crisis of 2008-09 a concluded recession. Quantitative easing to the extent we have seen (see Figure 2) in all the developed economies should have been more than enough to spur spending and therefore aggregate demand in a post recession world. This however isn't the case. Deflation and lack of growth are still at the front of every central banker's mind in these economies, as they wallow in the denial of their ineffectiveness to salvage economic growth. It is not monetarists that the world needs now; it is time for the Keynesians to shine.

: Figure 2: Money Supply in USA

The inability of easy monetary policy in spurring credit growth and the rather high levels of indebtedness in the developed economies indicate a top in the long term debt cycle. When the cash flow crunch causes the deleveraging process to commence is anyone's guess but a look at Figure 3 indicates that it is likely to be sooner than later.

: Figure 3: Household debt service at an all time high in USA

The over-indebtedness of the borrowers makes sensible lending impossible, thus rendering easy monetary policy as a tool to create easy credit growth, useless. The above charts clearly indicate that the scenario of fundamental imbalance that we find ourselves in today, is most similar to the circumstances seen in the US in the 1930s- a depression, not a concluded recession.

Combating the Implications

It is imperative to study the methods of combating these implications simply to make an educated guess of the what to expect from government policies across the developed world over the next decade. The debt to income ratio can be tackled down with two sets of policies:

Deflationary and Recessionary- Debt reduction methods including austerity.
Inflationary and Stimulative- Debt-monetization and heightened government spending.

While parts of Europe has adopted the former, US seems to be on track to adopt more of the latter. This predicament the economy finds itself in, coupled with the election of Donald Trump has paved the path for the Keynesian thought process of 1930s to take over USA today. This recovery, however, will be a onerous process as infra spend is a long term commitment and current level of debt will raise the difficulty level of the conundrum. Figure 4 however demonstrates a template from the past to help determine our expectations of the future.

: Figure 4: Federal Budget Surplus/ Deficit in USA

The appendage of fiscal stimulus can only be taken away when we return to normalcy; i.e. "only when capable providers of capital willingly chose to give money to capable recipients of money." For this to occur the populace will go through denial, reluctance to accept lower credit and therefore lower spend levels, acceptance of the new normal, admittance of the fiscal stimulus into their systems and finally ability to run without the appendages again. This elongated deleveraging process will cause a shift in the global economy; the lull period in the developed economies of today will be capitalized. The occurrence of the shift is even more obvious from the Figure 5 below. The developed of the past will become the developed of the future.

: Figure 5: % Share of the World GDP

The Political Cycle Implications

Dalio's framework suggests that there are five stages a country goes through:

Countries that are poor and think they are poor- Transition from such a stage is gradual and only initiated with minor structural reforms which results in Foreign Direct Investment in the country in order to take advantage of its low cost of production. India's economic liberalization in the early 1990s would be that reform that has transformed the country over the last two decades. Without such reforms countries can be stuck in this phase for a long time.
Countries that are rich but think they are poor- Such nations are characterized with hard-work, immense amounts of savings as they are unsure of the future and predominantly an export led economy. China in the first decade of this century would be a textbook example of this stage.
Countries that are rich and know they are rich- With a generation being born into prosperity, without the conditioning of the hardships faced in the previous two stages, countries that find themselves in the higher decile of nations (in terms of per capita GDP), act like it. Their economic prowess enables them to wield significant dominance over global politics. The "American Empire" that "ruled by speaking softly and carrying a big stick" post World War II is a classic specimen of this stage.
Countries that start becoming poorer but still think of themselves of being rich- Adorned with a phase of leveraging, debts start piling up as income levels do not support the spending sustained in the earlier state of 'richness'. The end days of this stage are denoted by repeated asset bubbles. In hindsight, the first decade of the 21st century in the US which witnessed two massive bubbles- tech bubble in 2000-01 and financial crisis of 2008-09 is likely an example of such a case. Britain between the two world wars would also fit in with this stage.
Deleveraging- With the growing imbalance between credit fueled spending and income, great countries and nation empires of the past go through a phase of decline and those in stage 3 at the time take over from them.

Dalio's framework of long-term debt cycle leads us to a similar political conclusion for the future of this world as discussed in the previous post. His framework however enables us to better understand the progression from today, to that conclusion while giving us a reasonable guesstimate for a timeline that can be deduced upon using his template.

Note: To further understand Dalio's framework read his book titled Economic Principles. The link for the same can be found here.

History of the World

2016-12-06T16:34:00.001+05:30

Disclaimer: This is my most ambitious post yet for I am trying to condense thousands of years of human history into an essay, sincerely (and most likely foolishly) attempting to recognize patterns therein; in an effort to better understand the resurgence of nationalism today. In writing this I am not trying to make a contention of my historian credentials (for I have none) but merely positing a theory that emerges from my perception of the repeating stories in history.

My hypothesis is that despite differing manifestations, the circular story-lines in history do repeat themselves. The difference in my view stems however from claiming where the cycle starts. Since it is a circular recurrence, there is a chicken and egg problem. Nonetheless, I believe that we have smaller groups (families/ tribes/ nations) that are born and just as children's conscience and minds which are clean slates, wanting to learn from everyone around them- these smaller units engage in trade with everyone around them to gain as much knowledge as possible from them. It is this trade that results in fostering the spirit of globalization and internationalism. As these units expand their numbers and horizons, they start forming beliefs and strong sense of self; quite like an adult. This sense of self stems from generations being born into prosperity directly. As the spirit of nationalism heightens, generations born into prosperity grow detached of the world outside the unit. This inward looking behavior continues resulting in a display of a class struggle within the unit eventually disintegrating into distinct different new units. And so the cycle starts again.

I. Ancient: Hunter gatherers to Civilization to its Collapse

As hunter gatherers, homo sapiens only looked out for themselves at first and later their tribes. As we underwent the neolithic revolution with the discovery of wheel, cereal crop cultivation, mathematics and cursive script, we began settling down and forming urban centers. These urban centers traded with one another in order to gain the best products from each others. The centers that thrived flourished into civilizations- Mesopotamia (3500 BCE), Egypt (3000 BCE) Indus Valley (2500 BCE) and China (2200 BCE onward). As trade grew, a complex economy structure developed with barter system giving way to currency. The regulation of these innovations demanded a central government and sophisticated language and writing skills. With prosperity and a need to legitimize a government, cultures and religion emerged. Religions that started with praying to the natural elements enabling flourishing trade, ultimately resorted to deitification. It is with these deities and the myths conjured to legitimize their being, that competing philosophies started emerging in the world giving rise to the Axial Age (in 8th century BCE). An era of global trade and prosperity was about to give way to more self-centric sentiments.

Confucianism, Jainism, Buddhism, Jewish Monotheism all emerged approximately in the same century- 6th century BCE. The societies propagating these religions came at odds with the ideal Republic vision espoused by the Greek Philosophers Socrates and later Plato in 5th century BCE. Alexander the Great made an effort of getting the western school of thought into the east but competing theologies had already created regional empires here- Median in Iran, Mauryan in India and Han in China. We had become more inward looking. As these regional empires persisted, heavy costs were levied on peasantry and land-owners born into prosperity increasingly exercised their power of abuse while evading any sense of duty. Pressure on the frontiers and discontentment brewing within led to the collapse of these regional units into smaller groups.

The Han dynasty gave way to the triple kingdom in 220 AD which later disintegrated further with the invasion of the nomadic tribes from the north in 4th century AD. China remained a constellation of small kingdoms until the establishment of Sui dynasty in 581 AD. Similarly the Roman empire disintegrated into warring nations under the Germanic tribes with eastern part of the empire being annexed into the Byzantine empire.

II. Pre-Medieval: Silk road to Crusades to Black Death

The fall of the Roman empire in 5th century AD allowed for the rise of early Islamic conquests. Arab slave trade, Mongol invasion of central and south Asia and the rise of the Ottoman Empire. The Islamic traders set up ports across Africa and Asia to facilitate the trade of gold, spices and other commodities. A second wave of global trade and internationalism had emerged.

All of the newly established nations under the Germanic tribes, associated with the catholic church. While the silk road acted as a bridge for trade between Asia and Europe, the merchant economy of the Islamic civilization along with the goods brought its faith into China, India, West Africa and to Turkey, the door to Europe.

Being born into an era of global prosperity and motivated by a common allegiance to the catholic church, the kings of Europe, 11th century AD onward, launched number of crusades to push back Muslim power and retake the holy land. Their colossal failure at this task was exemplified with the onset of the plague in the 14th century AD which wiped out over a third of the population of Europe.

III. Medieval: Renaissance to Trade to Fall of Imperialism

With an utter lack of resources and will to fight, the European nations entered a phase of rebuilding themselves. The knowledge they gained from the developments of the Islamic world upon their interaction on the battlefield pushed them down the road to Renaissance. Scientific revolution owing to inquisitiveness having witnessed the glory of their opponents, resulted in these nations engaging in innovations and new manufacturing. The curiosity that formed the basis of this knowledge revolution forced them to be master seafarers and trade with new empires as well as continue learning from the old ones. Curiosity served with a dollop of necessity resulted in the third wave of globalization.

Machinery advanced with greater interaction with the rest of the civilized world and scientific revolution gave way to industrial revolution. Mass scale production of manufactured goods was witnessed for the first time. International trade flourished at first but with a generation born into such prosperity in the post Renaissance Europe, there now arose a need for acquiring customers and markets in order to ensure continuing profits for your nation’s factories.

This economic competition as a consequence gave rise to military challenges, which resulted in the creation of the modern system of nation states having aspirations for economic, linguistic, and hence socio-political dominance. The rise of colonialism and warring imperialistic states eventually plunged these nation states along with their territories at the time, into two gory world wars in the 20th century. With the empires stretched and pressure on the frontier, independence movements gained strength and swept across the ‘oppressed’ colonies resulting in the formation of new groups/ countries across Asia and Africa.

IV. Modern: Unions to Nationalism to ?

By mid 20th century AD, the world was reeling from the losses of the world wars and under the influence of new nations that aspired to gain from all their peers, in the nascent stages of nation-building. The fragile globe at such a stage entered into the fourth wave of globalization with the establishment of the European Union and United Nations respectively. Seeing the debacle of their own imperialistic actions, the European Nations aimed to re-brand themselves as a common market (rather than competing ones as in the past) under a set of common virtues including liberty and democracy. The United Nations was (intentional choice of the prepositional phrase) a valiant attempt by the giants of yesterday to maintain world order by having a forum to help themselves and the newly formed nations of the world. This era of internationalism was propelled even further with the onset of the information age given the improved transportation and communication, especially with the arrival of the World Wide Web.

But as Arnold Toynbee correctly asserts that ‘giants of yesterday are but pygmies of today’. The giants of today are not willing to accept gleefully the world order imposed upon them by those of yesterday (China a case in point for the current -lack of- functioning of the UN, WTO, etc.). In Europe a generation born without the memory of the excesses of the world wars and the imperial states that led to them is likely to take the EU and its advantages as a given. It is the disadvantages that the union brings to them in the way of immigrant crisis or outsourcing of jobs to those with a different linguistic predisposition, etc. that will be now at the forefront of their minds and hence their politics. So the rise of more inward looking behavior is natural; nationalism today is natural or at least given our history it should have been expected of us.

Now what?

To guess what could come next, I go back to my hypothesis,

“As the spirit of nationalism heightens, generations born into prosperity grow detached of the world outside the unit. This inward looking behavior continues resulting in more iteration ultimately ending with a class struggle within the unit. The unit eventually disintegrates into distinct different new units. And so the cycle starts again.”

The first statement is already being proven true given the recent votes in UK, USA, Italy and now possibly in France in 2017. In Europe the EU disintegration could be a stepping stone to setting up newer nations. In China we see the patterns of the Medieval European cycle being repeated- their investments in Africa and Latin America suggest their want to acquire resources, customers and markets. We have seen what forms that can metamorphose into.

I think, in my lifetime, the giant of today (which in hindsight can very well be ‘yesterday’), USA, will be dethroned. Newer nations will appear on the anvil. Gains seen in technology in transportation and communication will stagnate. Emerging powers- China and India- too will see a class struggle emerge within them. While I cannot control these things, a framework enabling me to understand where in this cycle (at times vicious and at time virtuous) of stories we are in, acts as a lens to view current happenings through.

The Placid Reform

2016-11-28T18:38:00.000+05:30

Amidst the brouhaha over the upcoming GST reforms, and more recently around the demonetization move by the RBI and the Government, a prolific reform, brewing for over a decade lies ignored. The APMCs (Agricultural Produce Market Committee) as they function today will be replaced by a national e-market for agricultural produce.

Why is this necessary?

In the 21st century, India has journeyed from a being a 476bn USD economy to a 2trn USD powerhouse (implying a CAGR of 9.3%). The largest sector (by employment) however missed out on this journey and have only registered a CAGR of 6.5% in the same time period. What is even more disheartening for over half of the nation's population employed in agriculture and allied services, is that the middlemen have eaten away from this sub-par growth leaving them declining real earnings at times over the last decade. The consumers on the other hand faced double (and at times triple) digit percentage point inflation in the prices of foodstuffs. This resulted in abnormal profits for the middlemen but excluded half of all Indian households from benefiting from the gains in pricing of their own product.

59% of India's GDP relies on private consumption. For India to, therefore, become an economic growth engine participation of the masses is vital. Half of the households that are employed in farming and related activities can no longer be excluded from our growth story.

The Draconian Way

As the system stands today, the local APMC must be the first point of sale for the farmer. The limited number of licenses per APMC in such a system, gave a rise to a bandit of politically favored traders that colluded to lower the prices paid to the farmer while inflating the retail price by controlling the flow at times.

To add to their horrors, each APMC had its own structure of levies and market fees that imposed on all participants. Additionally, they also had a menu card for any of the services that the farmers would have to avail from them.

The Contemporary Way

Adopting the spirit of the Model APMC Act passed in 2002 and combining the same with the digital advancements the world has seen since, the Government of India will now replace this with a national e-market.

The tenets of the Model APMC Act that this initiative will entail:

Single license valid across the nation
Uniform fee structure applicable for levy at a single point
Consumers, Corporates and Contract farming sponsors to be able to purchase directly.

While this gives the farmers more autonomy over their produce, it is the tadka of the national e-market that really aids in redistribution of wealth and power from the middlemen to the producers. A preview of this move is on display in the state of Karnataka.

The e-market there enables the farmer to deposit their produce at any APMC in the state. The APMC then tests for quality and grades the produce and updates the detail of the same on a statewide online portal. Any registered bidder (trader, corporate, etc.) can place a bid for the produce and can up the bid at any point of time as well based on competitiveness of the bid. At the end of the day the farmer receives a SMS with the best bid and can accept or decline with a click of the button. If he/ she does accept the money gets transferred directly into their bank account.

Why is this significant?

By March 2018, 585 of the 2000+ major Mandis in this country will be on the national e-portal. The software for the same will be provided by the Department of Agriculture and Cooperation in addition to an allowance of 30lakhs per Mandi to implement this platform.

APMC is hardly an exciting topic that is absolutely incapable of inspiring an invigorating discussion but surely warrants one. It redistributes wealth and control by preventing its concentration in the hands of the traders/ middlemen. But more silently, a transparent nationwide price discovery mechanism enables an environment of structurally low inflation vs. the 100% rise in onion prices we see oh so frequently. In light of food and beverages constituting of 54% of India's CPI index, this move is monumental to say the least.

Are they thinking again?

2016-11-25T12:17:00.002+05:30

The recent launch of the NM App warrants the question, "Is the ruling party doubting their move?" or perhaps, "Are they now skeptical of their own estimation of the opposition's ability to turn this to their advantage post the by-poll results?"

The following graphic from Bloomberg Quint illustrates succinctly how the ruling party may have wrongly estimated people's willingness to "suffer" for the greater good.

In Lakhimpur, Assam, the BJP may have retained their vote share but demonetization has surely helped the INC to consolidate the opposing vote share and increase their share by eight percentage points!

Political Maneuver? Think Again.

2016-11-25T12:09:00.002+05:30

17th November 2016

Whether one hailed the Prime Minister's move to demonitise currency notes of Rs. 500 and Rs. 1000 or found themselves obloquious of the same, everyone seemed to agree that this move was timed well for UP and other upcoming local and state elections. We too gave into the notion and thought for a while that we were right; after all it did indeed claim a victim as well- AAP in BMC polls (or the timing of the same was fortuitous).

Alas, be it sheer altruism or mis-calculation of risk (in politics always believe the latter) it seems that this move could very well be BJP's undoing in the upcoming local and state elections. The evidence of this is seen in the front page ad of the newspapers today articulating and reiterating the difference between a bad loan write-off and waiver. The PSU banks are writing off 63,000 crores worth of bad loans as they are flushed with liquidity and have (finally!) the ability to provide for the same in their balance sheet. The sheer amount of financial jargon I have used in the previous sentence demonstrates the ease with which the opposition parties/ forces can convince people that a loan write-off constitutes as a waiver. The strain the farmers find themselves in today make them a vulnerable target for such disinformation; the strain for which the government cannot be blamed but can be held responsible for now, thanks to the multitude of its opposing forces.

District Co-op Banks are not allowed by the RBI to participate in the exchanging of demonitised currency notes. Customers are simply allowed to withdraw from these banks- the problem herein being, there are no new currency notes stocked with them. Time and again RBI studies have suggested money laundering activities being facilitated by such banks. Reports of politicians using the technologically challenged co-op banks to issue back-dated FDs post the PMs announcement surfaced post which the RBI, in a statement dated 14th November 2016 excluded the banks from this process (opposition parties' officials at the helm of these banks could also be a motivator). The price of one another shall pay.

Of the 8 crore cultivator households in India, 7.5 crore take some form of loan for cultivation from a financial institution. 3 crore of these take it from these banks, though the share of these co-op banks in the credit flow is at a lower 29%. 66% of the loans made by such banks go to small and marginal farmers, a proportion higher than the 55% for commercial banks.These banks have an unsurpassed outreach at the grass root level and therefore crippling them, even for the right reasons, would agitate the farmers.

Loans against warehousing receipts by NABARD are not viable as well since the farmers are unable to move their produce. 50% of the country's truck drivers are currently idled- to an extent, possibly purposefully. The harvest is piled up at farms (a gross but not entirely incorrect generalization on our part) inhibiting income flow and co-op banks are disallowed from the currency exchange program hindering credit flow. We may face an issue of food price inflation before the promised wonder of structural disinflation kicks in.

In view of such a liquidity crunch faced by the farmers during the Rabi season preparation time, the local political forces seem to be milking the situation to the greatest extent possible by claiming a PSU bank's write-off, to be a 63000 crore central government waiver to the industrialists.

Add to this potent mix, the local politicians giving away their accumulated unaccounted cash to farmers as a short term crop loan (interest- free!) and voila! not that smartly timed after all it seems. The government's intention were not in anyway misplaced, but they underestimated Indians' aptitude for engineering (financial included) and overestimated the nobility of their opposition/ peers (though when not in power they would have possibly done the same).

The Valuation Impediment

2016-10-07T22:36:00.000+05:30

Since Budget Day 2016, the NIFTY has seen a massive rise of 27%. As a result newspapers, TV channels and other media outlets are awash with stories of how there is an impending crash ahead and how valuations indicate a bubble, etc. Undoubtedly the chart you have seen everywhere is the one below:

It is true that the P/E multiple and most of the other relative multiples are above their long term average. Though these multiples in themselves are objective, as numbers always are; their interpretation is completely subjective. In eloquence, while price is objective, value is always subjective. The spurt in multiples is not a uniform phenomenon though- it is driven majorly by three sectors: private financials, automobiles and consumer companies. While the complacency in some of the proclaimed “quality” stocks has resulted in frothy valuations for those companies in these sectors, a certain degree of the higher valuations in these companies as well as their peers will sustain.

What are my options in India?

Savings in India can be parked in gold, real estate or financial assets.

Gold?

Purchases of Rs. 2 lakh or above from any jeweler require a PAN Card. The advantage of parking undisclosed income in gold is no longer a meaningful one given the 2 Lakh limit on it. Given that individuals would be forced to deploy only their disclosed income in gold for the most part- taxation becomes an important consideration. Except for indexation, there are no advantages from a taxation point of view as well should you chose to liquidate your savings in gold in the long run (note: long run in this case is defined as 36 months.

These are the regulatory hinderances to investing more in gold. The key questions that we as Indians also have to answer is how much more can we invest in gold? An all India investment and debt survey done in 2012 (see table below) clearly demonstrates that except for the 99th percentile (or the “1%”) most people buy more of gold than consumer durables. This too has changed- with frequent technology upgrades and an heightened aspiration for consumption, the desire for consumer durables is only bound to increase and most likely going to eat into our consumption of gold. And gold prices are where they were 6 years ago, dissuading investors from gold. Consumption and investment in gold by Indians, therefore does not seem rational at this point.

All India Investment and Debt Survey 2012 Findings

Real Estate?

Real Estate is the largest parking lot of Indian household savings. It absorbs over 50% of savings and over 85% of Indians’ total investment and debt utilization. The investment appetite for this asset class, however, has completely evaporated. Rental yields in metros hover around 2% (annually!) making it an asset that may contribute to your net worth but does not do much for your income. With massive illiquidity being the classic feature of this asset class, even more so now at such high prices, investors are wary of real estate.

With the looming implementation of state-wise regulators under RERA (Real Estate Regulation Act), builders are unwilling to do cash transactions. 70% of the payments collected from buyers is now escrowed, only to be used for contraction purposes. The appreciation of prices noted in the past, on account of increasing amounts of cash with people leading to a rise in demand for real estate, has finally come to rest. In the NCR region the asset class has deteriorated to the extent of builders now advertising discounts on their projects.

Financial Assets?

With falling interest rates we have seen Fixed Deposit rates, PPF rates, etc. come down. Post tax return on fixed deposits hovers around 6% now, barely beating our rate of inflation. Suffice to say that, it hardly makes an interesting case for investors.

All of the above asset classes and the conundrum in which their investors find themselves in, indicate that the flow should shift someplace else. India’s GDP is 2trillion USD. Over the course of the remainder four years of this decade we shall add a trillion USD more to our GDP. With a savings rate of 30%, thats 900bn USD of additional savings until FY20. Given the illiquidty in the real estate markets, especially now, assume that the 50% share of financial savings increases to 60%. Given the fall in interest rates, assume that of the new financial savings one-third comes to the equity market- that is a jaw dropping eleven lakh and seventy thousand crore of rupees. You can discount it a by a factor of ‘x’ whatever you may chose it to be, you still know that this is a significant amount. Juxtapose that with the highest domestic inflow we have seen in a year- 70,000 crore in 2015. The highest ever number seems measly now.

Seen in the context of such a staggering imminent flow (it can take 6 years instead of 4 but that’s the extent of the deviation possible in my outlook), the prices today don’t seem overtly high. Higher multiples could very well be the norm going forward for investments are made not by looking at the past (no point comparing to historical averages) but with a vision of the future (underlined by an astonishing influx of money).

What are my options globally?

Ray Dalio has talked about the corporate de-leveraging being on the cusp of commencement in the west (an idea discussed in my previous write-up). Industrial growth seems like a distant possibility in the west owing to such a phenomenon. To add to that we have negative rates and increasing amounts of self- inflicted destruction.

Negative Rates?

Six nations, are in a negative interest rate territory today. Rates have been far too depressed for far too long that they have seized to be an effective tool for monetary policy, especially coupled with the corporate de-leveraging. Every couple of months a “new” Fed rate hike story floats around the markets putting equities in a temporary panic mode. Even if there is a rate hike, how much further up can we go from 0.5%! Even at 1.5% we are still well below the rates seen historically, when 18x was the long term average NIFTY P/E multiple (as seen below).

Socio-economic uncertainty?

The BREXIT vote has marked what I believe will be the end of the European experiment. The parasitic leaching of German tax-payers cannot be sustained for eternity. Italian banks see a system wide NPA level of over 18%, Portugal over 12% and Spain over 10%. This problem seems further accentuated when only non-financial business loans are considered; 30% in Italy, 16.5% in Portugal and 13% in Spain. Combine this with the breaking away of their largest trading partner (UK) from their common market and we have a massive problem approaching. The western world is far away from any meaningful economic growth.

China, the perennial alternative presented to India, is also brewing trouble. Real disposable income of urban consumers has slowed to 5.8% in Q1FY17 vs. north of 10%, a decade ago. Households are therefore leveraging to sustain consumption. Consequently, household debt as a percentage of bank deposits stands at 50%, double of its 2009 levels. Though this is nowhere near the excesses of the west, a quarter of all mortgages outstanding in China today has been taken out in the last 12 months. The NPAs there are not going to stay low forever. A slowdown and maybe a few shocks are inevitable there as well.

In the light of deceleration of growth elsewhere, negative yields and rising bad debts globally- Indian stock prices may not be over-valued.

What should we do?

There are pockets of over-valuation in the Indian markets. It would be foolish to deny that. IPO markets are a classic case of the same; but in face of the quantum of domestic inflows we are going to see in the Indian equity market- we should adjust to this new reality. While multiples are becoming difficult to grasp, if we stick to the approach of deciding the value based on the company’s market capitalization, decisions can be made. A 500cr company growing at 20% can command a 40 P/E multiple in today’s market. The question to be asked for your sanity is: Can this be a 1000cr company? Fail to change your viewing glass and you could lose out on a bull run of an enormous proportion. The choice is yours, the choice is ours.

The argument that Congress should have made and the media should have covered

2015-08-16T22:19:00.000+05:30

And once in a while everyone staying in a democracy has this urge of wanting out- witnessing the past week in the parliament was that moment for me.

Why a fugitive from justice governs the debate (or the lack of it) in our parliament-baffles me. Why a leading news reporter that wishes to place India above all, give importance to such a person by traveling ten thousand six hundred and twenty eight kilometers to interview him-confounds me. I guess it really does go to show that in India, cricket is a religion.

The discussion should have been focused on the contents of the GST bill. Unless they were auditioning for one of the many reality television shows in our country, the legislators should not have resorted to vicious personal attacks instead of talking about the appropriate rate of tax under GST? The economic participants it would impact? And the degree of that impact? The ruling party cites a benefit of two percentage points of GDP growth on successful implementation of the GST bill. If this was the case- why did they let India sacrifice six percentage points of GDP growth and raise opposition to the GST proposal in 2012. And why is the opposition currently succumbing to the same tactics that resulted in inefficiency during their years of governance. Why is no one asking for the basis of this two percentage point incremental growth estimation? Why are we not questioning if the supposedly proposed 25-27% GST rate is going to deliver additional growth?

Approximately half of the domestic indirect taxes are collected on goods (taxed at 30% roughly). The other half comes from services (taxed at 14%- raised from 12.5% in anticipation of GST). To impose a common tax-rate on goods and services such that the rate of inflation is not impacted by the same, 21.25% (based on 12.5% VAT)- 22% (based on 14% VAT) should be the ideal range to focus on. The government's proposal on 25-27% is significantly higher than the inflation neutral rate. It is therefore tough to imagine how tax induced higher prices for goods and services are going to result in additional two percentage points of growth for India. The proposal of 18-20% GST may not be revenue neutral but may have advantages in spurring growth. Why was this difference in approach not the focus of the debate? And why did the media not force the legislators to such a debate by ignoring the comments of a person who wants to assume importance by causing chaos.

We, the people of this nation deserve better. Our intelligence deserves more respect than what we were shown this past week. Our legislators need to be more in awe of the place they work in and the constitution that has given them this right. This may sound preachy and unlike the other posts on this blog- but the level of debate in our country needs to be raised.

Disclaimer: The IIP may not be what you think it is.

2015-06-14T11:42:00.000+05:30

I wish I had written the following article a month ago. I, for some time, have been a believer that we are going to see an inflection in the business cycle of India. But every time I would utter such a view point I would be met with an onslaught of sell-side and media reports talking of how corporate India is bleeding. The key metric that traders await to affirm this negative view is the monthly Index of Industrial Production (IIP). Until Friday June 12^th, the numbers for this year have been disappointing and non-indicative of any real activity growth in the economy. (I am a non- believer of the index but do not intend to change your stand on it).

For a number that is quoted very often in leading financial newspapers and used frequently by traders to move markets in either direction, very little reporting is done on the method of arriving the number. Below is the disclaimer that any report judging the economy’s strength on the IIP, should contain.

“The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period.” So in other words, the IIP is an abstract number which represents the magnitude of the production in the industrial sector for a given reference period. The IIP index published in India by the Central Statistics Office (CSO), however, only deals with registered manufacturing units. By definition this includes those manufacturing units that employ 10 or more workers and use power; and 20 or more workers but use no power. On an average, the entire manufacturing sectors accounts for 16% of India’s GDP. 10 percentage points of that comes from registered manufacturing units but 6 percentage points of that comes from the non-registered manufacturing units, which get ignored in the IIP calculation. Therefore, the indicator the market uses to gauge the manufacturing strength in India in fact ignores 37.5% of the manufacturing in the country.

Also, the United Nations Statistics Division expanded the scope of the index to include Mining & Quarrying, Manufacturing, Electricity, Gas steam and Air-conditioning supply, Water supply, Sewerage, Waste management and Remediation activities. Due to constraints of the data availability and other resources, the present general index of industrial production compiled in India has in its scope limited to Mining, Manufacturing and Electricity sectors only. Thus of the 10 percentage points, a few registered manufacturing units are still not covered in the Index given the limited scope of the survey.

It is difficult for the CSO to standardize the data even within this limited scope. With 16 different sources contributing to the index, standardization of data collection across the nation becomes an even more of an impossible task.

This difference in data collection could result in the index portraying a different picture of the ‘ground reality’ than the true facts. For example the sample size for data collection for the different components is decided by the respective source agency. The only guideline stated in the CSO handbook says, “Generally, efforts are made to cover all the major units”. The definition of major is however left up to the source agency and it has changed with time depending on whether the department is understaffed or overstaffed.

“The basic data used for compilation of the index is the production in terms of quantity. However, there are certain items especially capital goods such as Machinery, Machine Tools, Ship Building etc. on which the production data is furnished in value terms. In order to remove the effect of price rise from the index, the production figures of such items are deflated on the basis of Wholesale Price Indices (Base 2004-05), compiled by the Office of Economic Adviser, Ministry of Commerce and Industry, before compilation of index.” This is yet another example of how the different sources of data can lead to discrepancies owing to differing methods of data collection.

Given the size of the undertaking, and the varying sectors covered by the index, it would be nearly impossible to conduct the operation without different sources. It is however the lack of standardization across departments and the consequent lack of data validation checks that require this to be highlighted as a glaring drawback in the quality of the data point released every month.

Before releasing the data, the CSO confirms the accuracy of the data points with the source agencies if there is a significant deviation from the data point in the previous month. The underlined word in the previous sentence demonstrates the peril of using such an index.

The intention of this article is not to convince people to ignore the IIP numbers altogether but rather to provide a disclaimer for those ‘consuming’ this index. Put in a cliché manner, the intention is to provide one with the grain of salt to ‘consume’ this data with.

Maybe there is still some lustre in gold

2015-06-02T09:14:00.001+05:30

Given the performance of the equity markets in India, most financial newspapers are gung ho about how retail investors should invest in mutual funds or SIP's and not even consider real estate or the eternal global currency, gold, as a form of investment any more. But maybe there are a few gains to be made by investing in Aurum.

Overall thoughts on the commodity

Fundamentally speaking the gold markets seems to be in balance. The degree of imbalance in the short term would at most be demand falling by 1% causing a temporary imbalance but otherwise I do not believe that there is an imbalance in the physical market. With capacity additions now tapering off into H215, as per the new mine addition schedule, I think there could also be a slight tightening in the market. In terms of flows- currency uncertainty, the fall in Chinese markets witnessed last week and the risks of a Greece default and delays of a fed rate hike given US GDP shrinkage numbers being released last week- all lead me to believe that gold is positioned to correct upwards soon.

I don’t know if we will see the 40%+ recovery we have seen in oil prices since they have bottomed but I would not be surprised. I have realized that in the most traded commodity markets- oil and gold- the market imbalances don’t have to be great for there to be an immense pressure on prices induced by financial liquidation. Even with oil the imbalance was of just over a percentage point that precipitated into a 55%+ decline.

Risks to my view

There are two fundamental risks to my view. One would be rising retail domestic investor involvement in the stock markets in India. Jewelry demand in China fell by 10% in Q115. Though this was in comparison to a historic high in first quarter demand in China in 2014 and though the demand was still 27% above the 5 year demand average in Q1, a part of this decline can be attributed to rapid rise in the domestic equity markets. Gold is looked at as an alternative investment by many retail investors. If domestic participation by retail investors in the local stock market rises, some demand for gold would be lost. 8 million new accounts (DMAT) were opened in China in Q115; a 433% increase y-o-y. Given the rising involvement of retail investors in the domestic market in India, jewelry demand supported by need for alternative investment could take a hit.

Another risk to my view is the surge in recycling of gold in Turkey. Given the slowing economic growth, rising unemployment and growing political risk in Turkey, we witnessed the Turkish Lira plunging in Q1. This propelled the price of gold locally to 100 Lira/ kg with gold. This caused a lot of people to cash in their gold for currency and led to a rise in recycling supply for the metal.

How the flows work in Gold’s favor now?

Investors turn to gold, the eternal global currency, when paper currency markets register volatility or in cases of geo-political instability. The world seems to be ripe for both of those to occur now. Currency volatility has dominated 2015. The one popular trade- long dollar- is also lightening up now with people unwinding their long positions owing to uncertainty of a fed rate hike.

Movements in real rates are inversely related to movements in price of gold. With the shrinkage in US GDP noted last week it seems even more unlikely that the Fed will raise rates in their June meeting. This coupled with the rising risk of default in Greece as well as the uncertainty of the future of Chinese markets given the over 9% drop in the Chinese A Shares within two days last week- will force some retail investors into gold.

Moreover the relative strength of the underlying commodity to its miners’ stock price seems to be at a historic high. My guess would be that should there be a correction we would see miners correct a lot more than the commodity price itself.

How do the fundamentals hold up?

Globally, Q1 demand was only slightly weaker than last years’ with most of the fall caused by the increased domestic participation in the equity markets in China. Given the move last week, some of the fringe investors will be drawn back to gold. Moreover growth in demand in India, SE Asia and the US should offset the fall in demand in China.

The key fundamental factor supporting my view on gold is the supply curve. Not only are the mine capacity additions tapering off in H215 but we also see the cost curves adjusting to the lower gold prices having faced lower prices since mid-2013. A correction in gold prices will therefore create increased cash flows per ton for miners who have devoted a lot of the operational energy on lowering costs and adjusting to the new price levels over the past few quarters.

The Indian consumer story is not lost

2015-05-13T14:45:00.000+05:30

It is strange that the day one of India’s leading financial newspaper chooses to print a bearish front page warning of the “Storm of Worries” that lie ahead in its growth trajectory based on qualitative responses, a very bullish (and almost real-time) data point gets hidden and lost in the same publication’s Page 12.

Indirect tax revenue collections rose 46.2% in April Y-o-Y, from Rs. 32,661 crore to Rs. 47,747 crore.

Table 1: Indirect Tax Revenue Collections in April 2015 by segment

Indirect Tax Component	% increase Y-o-Y	Nominal Value
Customs Collections	23.6%	Rs. 14,286 crores
Service Tax Collections	21.2%	Rs. 15,088 crores
Central Excise Collections	112.3%	Rs. 18,373 crores

Increase in the collections of indirect tax revenues speaks to the strength of the consumption power in the country. Customs collections speak to the strength in imports whereas both service tax revenue and central excise tax revenue speak to the domestic consumption of services and goods. The potential of the Indian consumer is highlighted in this data release especially given the magnitude of the increase and the fact that it occurred in April. Historically, April has seen weak collection numbers owing to higher tax payments made in the month of March resulting in refunds being issued in April.

A portion of the increase in service tax revenue collections can be attributed to the increase in the tax rate from 12.36% to 14% in the budget for FY16. However the tax rate has increased by 13% whereas the service tax revenue collections are up 21.2%.

The staggering jump in central excise collections is especially surprising given that these numbers were announced following data on retail inflation being released. Retail inflation in India eased to 4.87% in April, the lowest it has been this year. Both this and the consumer food price inflation numbers came in below analysts’ predictions. Consumer food inflation slowed to 5.11% in April from 6.14% the month before. Last April retail inflation and consumer food inflation came in at 8.38% and 9.21% respectively. Therefore the pickup we see in this year’s collections is not a result of price increases. There will definitely be an element of consumers using more cards in transaction or asking for a receipt of their purchase diminishing the consumption with unaccounted for cash (which cannot be taxed by the government). However that cannot be the only factor contributing to the magnitude of this increase.

The government has been able to generate such a growth in tax revenues despite having VAT and other indirect tax rates be lower than other major economies in the world. Only Switzerland and most states in the US have a tax rate lower than India’s.

Table 2: VAT Rates around the World

*USA does not prescribe tax rate at a federal level but at an individual state level.

Source: IBFD Tax Research Platform

With the publication prophesizing the storm and HSBC downgrading India to underweight, this crucial data point maybe overlooked or be considered the peak before the fall. However the marginal propensity to consume is lower in India than in other major economies and consumption still accounts for a lower percentage of the GDP (approx. 55%) versus the 70% witnessed in the US or the UK. With rising incomes as well as rising propensity to consume, indirect tax revenues will also continue to rise.

This is one of the better ways to track the strength of the consumer in India and would remain a key metric going forward.

Fiscal prudence lost with the new budget

2014-07-11T17:29:00.004+05:30

The people of India voted in change however the Budget for the first financial year of the new government’s tenure lacked the change. The budget presented in the house today for the most part lacked a clear direction and seemed like a chaotic presentation of some good and some confused ideas. Given India’s precarious fiscal situation- controlling deficit and inflation would have seemed like the most obvious goals for the new government to work towards however this was not the case

Excessive and disorderly infrastructure spending

The total budgeted expenditure for 2014-15 is 12.9% higher than the revised estimates for 2013-14. The government aims to increase its net tax revenue receipts by 16.9% this year which can only be seen as a gross over-estimation. The minimal direct tax reforms including the increase in the income tax slab by INR 50,000 or increase in the investment allowance for individuals is unlikely to raise the tax to GDP ratio. It is not a laffer curve issue with the Indian masses but rather the lack of a crackdown on the abundant tax offenders in the nation. The all-cash/ black money economy will not be tempted to convert and start paying taxes with an increase in the income tax exemption limit.

The government will set up Infrastructure Investment Trusts (InvITs), a modified REITs type structure for infrastructure to reduce the pressure on banking for infra as well as increase fresh equity available for the same. Infrastructure however for the most case is depreciative in nature and public infrastructure rarely functions on the given time schedule. The cash flow from these projects would be a distant reality dampening the allure of such a product.

The most disheartening sight in all of this is however the excessive government spending on public infrastructure undertaken in a disorderly manner in an inflationary environment. The government for example is awarding 16 port projects this year with spending INR 116 billion on a single harbor development project itself. This is despite the total traffic being handled at these ports witnessing a decline for the past two years. With not a sizeable increase in export production the construction of 16 ports seems mistimed. The focus on roads (INR 378 billion expenditure) is however welcome for a nation finally looking forward to building a manufacturing sector. Developing inland waterways and roads provides the manufacturers with much needed transport infrastructure. These domestic networks need to be prioritized over international transportation avenues and fiscal prudence would suggest that the latter be saved for later. Maintaining the fiscal deficit at 4.1% of GDP is not likely to be a reality.

Inflation remains uncured

With such immense government spending lined up for the coming financial year, price stability will be a distant reality. In an emerging economy facing an annual inflation rate of 8% and with 29% of the population staying below the poverty line food affordability remains a major concern. The budget however lacked any provisions to deal with the 30% of annual grain production that gets wasted in India due to poor warehousing facilities.

Barring a minor cut in customs duty on imported apparel, small TV’s and other non-essential consumer products there was not much relief for the Indian consumer. The government additionally imposed a 5% excise duty on imported met coal and a 7.5% duty on imported flat rolled steel (to deal with idle Indian steel capacity).

Select sectors receive attention however the ‘wow’ factor was missing

FDI cap was raised to 49% (from 26%) in defense manufacturing and insurance sectors of the economy. The management however is to remain completely Indian. The rationale for increasing the cap in defense is to counter the flow of foreign currency reserves brought about by the large amount of arms’ imports in India. The defense budget has also been increase by 12.4% this fiscal year. Reforms in the rest of the industrial sectors or for the business environment in general are missing.

The government’s recognition of the need to implement for a unified, central sales tax code in India and the conclusion of the debate around it is welcome. The business community however hoped for a clear deadline for when this new regime would be in play. The hopes for a streamlined tax administration were however not fulfilled in this budget. This was the ‘wow’ factor that businesses were waiting for that would have increase the ease of doing business in the nation.

Good developmental intentions are marred with misplaced allocation

There were several new initiatives undertaken by the government in developing the human capital of the nation. This was however not expected to be the focus of the budget. The budget had more welfare undertones than expected, even though a lot of the initiatives were marred with misplaced allocation. The starkest of these distinctions can be seen in the fact that the cause of girl child (and her education) received only half the money the construction of a statue warranted (33 million USD). The most upsetting fact in this allocation would be the fact that the state government had already spent 16 million USD on this statue.

The good intent of the government was however visible in the healthcare allocations announced. The focus on TB care (the pathogen is said to be present in 95% of Indians) shows the health ministry’s focus in containing a disease that affects almost all Indians. Construction of new All India Institutes for Medical Sciences coupled with the new government central drug regulatory authority will help enhance the quality of healthcare in India in a systematic, focused manner.

The expenditure (INR 5 billion) on training programs and motivation for teachers in primary education is crucial in improving the dangerously bad quality of teachers in public schools in India. The creation of new IIT and IIM (technology and management institutes) is however a populist move. These institutes are regarded as the best in the nation however with quickly deteriorating quality except for in a few locations has diminished the brand value of these schools. Other subjects that needed impetus in higher education were once again ignored by the Indian government.

The above stated are only a few of the developmental projects undertaken by the government with its new budget. The immense amount of spending and promised spending by the government makes a fiscal deficit of 4.1% this year, 3.5% in 2015 and 3% in 2016 seem like an impossible dream.

Women’s empowerment and economic development

2013-11-14T06:19:00.002+05:30

Word of caution: I am not a feminist. I am simply trying to be an economist.

Despite India being a “richer” country than Bangladesh, having a per capita GDP of 1509 USD (2011) as compared to the per capita GDP in Bangladesh of 735 USD (2011), Bangladesh has fared better than India in reducing poverty. Bangladesh saw a 3.2 percentage points annual decrease in multi-dimensional poverty (MPI) in 2004-2007 as opposed to 1.3 percentage point decrease seen by India in 2003-2006. The difference lies in women’s empowerment- both political and financial- between Bangladesh and India.

The difference in the level of the empowerment of women in Bangladesh and India can be demonstrated by a lot of factors, but two of the major causes for the same are the reservations of seats in parliament and financial empowerment of women via micro credit schemes. The constitution of Bangladesh mandates reserving 45 of 350 seats (12.8%) for women in the national Parliament however the Indian government has been unable to pass the women’s reservation bill calling for 33% reservations for women in the Lok Sabha. This mandated reservation of parliamentary seats has led to higher representation of women in the Bangladeshi parliament. Furthermore both the leading political parties Awami League and BNP have female leaders in Sheikh Hasina and Khalida Zia respectively. In a country where the party system is seen to be “two top down organizations with upward loyalty being the sole criteria for political participation” the leader of the party has an influential say in the policies they support. Considering both leaders are women, it is only natural that they support policies leading to further empowerment of women, thus such is the nature of the policies that do get legislated.

Political empowerment of women in India has not achieved any such successes at the national level. The women’s reservation bill was introduced in parliament in September 1996; however it still struggles to be passed. The current representation of women stands at a measly 61 seats of a 552 Lok Sabha seats (11%) in a country where women account for 48.4% of the population. The political empowerment (or lack thereof) factors in greatly in computing the GII which I use to explain the difference in poverty reduction rates between the two countries.

With political empowerment of women, comes more social freedoms for women and hence a higher chance to seek education and employment leading to financial empowerment. The argument I would like to make here is that with their empowerment women are able to lift themselves out of poverty as well as the future generations they mother because as they are more prone to focus their expenditure on the health and education of their children. This facilitates the future generation to secure a brighter future, one that would not entail them living in poverty.

One of the only microfinance/ grant provision made to women by the Government of India is the National Maternity Benefit Scheme (NMBS). Under this scheme Rs. 500 is given as a subsistence grant per pregnancy to women of poor households for pre-natal and post natal care for the first two live births. Given the male dominated governance and bureaucracy in India, not only is the allocated budget underused by approximately 22% but also 20% of these grants were made to families staying above the poverty line. This shows the inefficiency and the inadequacy of this scheme in garnering women’s empowerment and consequentially poverty reduction.

Given the arguments and evidence presented above, I believe that women’s empowerment- political followed by financial empowerment- leads to a higher rate of poverty reduction in Bangladesh than in India. A higher degree of women empowerment leads to cultivation of a future generation that is better off in terms of their health and education. This thus enables them to work more effectively towards improving their standard of living and alleviating themselves from poverty.

The Last Straw- Final Comment.

2012-02-03T23:59:00.000+05:30

There are many people who have already lost their patience with Anna Hazzareji and there are many nowhere close to that sentiment. However, personally I lost my patience with Anna Hazzareji’s ideas after his comments on the Republic day of India. The defiance of logic and respect, in his idea of empowering the Gram Sabha above the Lok Sabha, has the potential to convince many that just as his methodology even his motive is lost now. A movement that was supposed to have been an anti-corruption, has now become an anti-government movement specifically, anti-union government movement. However my contentions with the movement are not based on that issue, for in a democracy everyone has the right to voice their opinion regarding the government and their own elected representatives. Yet, I lost my patience when it came to empowering the Gram Sabha above the Parliament.

26^th January- the Republic Day of India; a commemoration of the day on which our Constitution came into action, is the day Anna Hazzareji chose to blatantly disrespect it. The first feature we learn about our constitution is that the Republic of India is ‘federal in form but unitary in spirit’ and in case of conflicts ‘the union shall prevail’. Hence, the very idea of empowering approximately 265,000 Gram Sabhas, over the directly elected Lower House of the Union Parliament shows utmost disrespect towards the Constitution and the spirit of India it thereby tries to establish. Furthermore, the head of the drafting committee of the constituent assembly, Honorable Dr. B. R. Ambedkar while presenting the constitution to the people of the Republic of India, stated his views as to what he thought would hamper the democracy in India. Use of unconstitutional methods was his biggest fear for India’s democracy. He urged the people to abandon bloody as well as coercive methods to bring about change. This means abandoning methods of civil disobedience, non-cooperation, coercive forms of satyagraha and fast. The usage of such methods, since the implementation of the constitution is according to him “nothing less than the Grammar of Anarchy.” What defies logic the most is Dr. B.R. Ambedkar is talked of as an inspiration by the members of the Anna Hazzare Movement.

Anna Hazzareji’s major contention with the Lok Sabha lies in its inability to pass the Lokpal bill through both the houses during the winter session. He says “550 people were giving their own suggestions” and there was no conclusive action taken. So to overcome the indecisiveness of one institution of 550 people, we must empower to 265,000 Gram Sabhas with a minimum numerical strength of 7 and maximum of 17, with each of the 265,000 Sabhas having a regional interest to further prior to anything else. I wonder what an IIM graduate would have to say regarding managerial diseconomies arising from such an arrangement.

Finally a personal comment; I respect and believe the constitution of India to be one of the most comprehensive and well crafted constitution in the world. To flagrantly disrespect it on the day supposed to have been celebrated to commemorate it does not amuse me. Denouncing the acquisition of areas to be a part of Economics Zones and Special Economic Zones (SEZ’s) by the central government as being a violation of the Indian villages simple states an intensely non-progressive attitude which is not what India’s growth story needs at the moment.

Out of context traditions and Inability to adapt- Can Gandhism really save us today?

2011-10-02T21:22:00.001+05:30

(I would like to thank Ms. Shagun Chedda for getting me started on this topic)

There is no doubt in my mind and I am sure, in every Indian citizen’s mind that Mohandas Karamchand Gandhi, the man we Indians call the ‘Father of our Nation’, played the biggest role in assimilating the movement of the upper middle class educated barristers under the aegis of Congress, into a mass movement under the aegis of the Indian National Congress.

Following this recognition is the impending question- What would Gandhiji have done if he were alive today? Post this most reach the conclusion that we should adopt his methods and views to straighten everything that’s “wrong” in our country today. Before taking this question up for discussion, I would want to highlight what Gandhism or rather the more popular term ‘Gandhigiri’ means to the Indians in 21^st century. ‘Gandhigiri’, a term coined by a Hindi Movie in 2006 has replaced any other term that we may have used to categorize Gandhiji’s ideologies. Passive resistance (possibly the more appropriate term) has now been replaced by Gandhigiri but in doing so Gandhi has been reduced only to his method of Satyagraha that too in the wrong manner.

Satyagraha consists of two words Satya (truth) and Agraha (insistence to hold on to something, in this case insistence to hold on to the fast). It does not mean that one must use this to torment the government, or any institution or any person into giving into their demand. This method was devised by Gandhiji to fight against the repressive rulers for what the majority believed was the truth. Gandhigiri as I see it is one of the Gandhian methods, taken out of context and twisted around to suit those who wish to use it against the people in charge. Whatever happened to arguing and discussing your point out in a democracy!

But coming back to our discussion of Gandhian methods, we must note that Gandhi was a firm believer in Ahimsa; non-violence not only in action but also in terms of thoughts and feelings towards a fellow citizen. Hatred, even for those were “evil” was not acceptable because he always said ‘One must hate the sin and not the one who commits it’. Well, in today’s most famous example of Gandhigiri, The Anna Hazzare Movement, this has been surely forgotten. Satyagraha was carried on but under the aegis of this belief of Ahimsa and against a repressive rule. Applying this method in today’s India, well that’s surely forgetting the context in which it was used. This is one of the biggest problems we face in our country today. The practice or the tradition as we call it lives on but the context in which the practice itself evolved is always forgotten. Do we seriously believe that our never ending conflict with our neighboring country, Pakistan, can be ended using Satyagraha and Ahimsa? Can the Telengana issue be sorted out using passive resistance? The answer, and I trust everyone’s intelligence enough in this case, ought to be an emphatic NO. There has to be debate, discussion, active strategy to resolve issues as the conflict is now amongst ourselves and not a repressive ruler. I urge everyone to please not follow actions blindly, but to think about the context where it was first used and assess then if it’s the valid course of action or no.

Following any path blindly demonstrates our inability to adapt. Though the Gandhian principles have been adopted in our constitution under the section of ‘Directive Principles of State Policy’, should we really follow these to make India better off today?

“To organize village Panchayats”

The acceptance of the partition plan proposed by the British in 1947 relied on the belief of our leaders then that they wanted a nation with a powerful Center. We have witnessed the problems we have the state government spreading regionalism to the very core of Indian politics today. Even now should we believe that decentralization of power in India is the best approach? I am not against having Panchayats and state government. We know that are essential in administering the world’s largest democracy. However Panchayati Raj and its eventual culmination into the Ram Rajya; is this really the ideal for India as a nation today? I know, I wouldn’t trust myself with Ram Rajya for people stay just as long as there is an associated suffering with injustice that they fear. If there is no check, and hence no punishment and suffering, its only human for people to fall into devious lives.

“To promote cottage industries in rural India”

India is today considered to be a potential economic superpower. Everyone today throws around the terms growth rate and GDP very casually. But could concentration on small scale industries and cottage industries have gotten us here? Cottage industries seemed the right choice 60 years ago when in our nascent state of freedom we were trying desperately to be self sufficient. And that’s exactly what the goal of cottage industries in villages is, to make every economic agent self sufficient. But aren’t we beyond the stage where our economic goal is self sufficiency? Don’t we all talk of 10% economic growth on our dinner tables without really knowing what policies have been undertaken to attempt and achieve this?

We have to change and adapt. A policy recommendation made by Gandhiji 65 years ago cannot be relevant today, the same way a policy recommendation made today will become irrelevant within a decade. No one wants only a welfare state today. Economic growth has taken precedent over economic development and welfare in today’s world. And if we set other goals for ourselves, the world will not change for us but yes, we may lose out on the growth opportunities presented to us today. Gandhiji aimed for development and welfare first. We do not have to discard that goal but yes, we have to adapt. Economic development can be derived from further economic growth. And this is what we must do.

Out of context is out of rationale. Changing values, goals and ideologies will help us adapt to our world better. And in this globalised world, we cannot live in isolation, we have to move along with the world for otherwise we stand to be the losers, not anyone else.

Sadly, we have built immunity now.

2011-09-18T02:26:00.000+05:30

The recent bombings in Agra for a moment upsets every Indian, but "our spirit to fight back" makes us move on. The frustration is no doubt there but it is like an annoying headache; you know it will disappear if you sleep on it. It seems that, there can be no two views, or two opinions here. Then why do I write alternatively India?

So, I am not going to post a prose/ essay on how something has to be done and all the hullabaloo that we see in the news, only for a day though, but just going to post something that was written on the day of the 13/7/ 2011 Mumbai serial blasts.

Hypocrites

- Harini Dedhia

The Headlines flash-

“Mumbai back on its feet” and

“The Mumbai spirit fights back”

And in a momentary lapse of judgment

I applaud those sitting in the local trains

going back to work having dealt with it all.

Dealt, with it all?

Change it.

Change it to haven’t dealt with it at all.

It is good to stay in a city like Mumbai,

where no one interferes in your life

It is bad to stay in a city like Mumbai,

where no one cares for your life.

The spirits of the dead

desperately searching for “the spirit of Mumbai”.

A wasted search;

The spirit does not exist.

Oh! Just there! I see the spirit!

We demand answers from the government!

We BLAME our politicians for stooping down,

playing the dirty politics – the BLAME game.

What Hypocrites we are!

Ideal Solution

2011-09-04T19:04:00.002+05:30

It has been quite some time since my first post and I apologize for the delay in preparing my next post. With so many events occurring and so many “popular opinions” being stated it takes time to grasp the situation and comment sensitively and sensibly on it.

“I believe that the real question before us as representatives of the people of India today is whether we are prepared to take the battle against corruption head on? It is not a matter of how the present impasse will resolve, it is a much greater battle. There are no simple solutions. To eradicate corruption demands a far deeper engagement and sustained commitment from each one of us.”

Almost every Indian today has been made to believe by the Anna Hazzare Movement that the passing of one Jan Lokpal bill is going to cure India of the corruption virus. Yet again we have the news media declare a war between groups and then decide its winner as well. On the fateful Saturday evening when Mr. Anna Hazzare decided to end his fast, “joy erupts amongst the common man of India” as “India wins battle against corruption”. The people have been made to falsely believe that the Jan Lokpal bill will be the single point solution to corruption. Here I would like to present you with a realistic case, almost a classic for all Mumbaikars. Switching lanes suddenly or breaking the traffic light leads to interaction with the traffic police. There is a choice to make here. Either pay the fine and get your license taken and go to the RTO office the next day to collect your license OR pay a bribe. And in this case I will not blame anyone giving a bribe as the system has an established process which is unnecessarily exhausting. So is having a Lokpal going to cure corruption? If I myself prefer giving the bribe to the established process by the system then how is a Lokpal monitoring the bureaucrats and government employees, going to heal the system? The system stays, my thought process stays, my want to give a bribe stays, the want to consume that bribe stays, corruption stays. The system needs to simplified and strengthened with mechanisms to cure corruption rather than curing corruption to strengthen the system.

But how to strengthen the system? There is no single formula really. There are processes which need to be refined and simplified so that the people do not adopt corrupt means. For example, after the success of the project in Thane distirct, the Setu project has been adopted by the Maharashtra government. Through this project, the basic certificates (such as the birth certificate) required by a citizen for any official purpose are issued almost instantaneously at organized camps for this purpose and with no requirement for a bribe. Hence these camps reduce the scope of corruption faced by the common man as he no longer needs to spend thousands of rupees to merely issue a birth certificate. Hence,

“An effective Lokpal law is the only one element in the legal framework to combat corruption. The Lokpal institution alone cannot be a substitute for a comprehensive anti-corruption code. Laws that address the following critical issues are necessary to stand alongside the Lokpal initiative

1. Government funding of elections and political parties

2. Transparency in public procurement

3. Proper regulation of sectors that fuel corruption like land and mining

4. Grievance redress mechanisms in public service delivery of old age pensions and ration cards.

5. Continued tax reforms to evade tax evasions.”

The above five points encompasses almost every sector of corruption we see in India today. The crores of “party fund” spent during elections; transparency in public procurement so as to avoid another 2G; regulation of sectors where corruption is rampant to avoid another Yedyurappa scenario; mechanisms to ease, simplify and shorten the process to procure old age pensions, ration cards, to avoid the common man from paying bribes; and lastly tax reforms to evade tax evasion so as to curb private sector corruption. Can one Lokpal take care of these? Certainly not. The Lokpal can supposedly ensure curbing corruption within the government but is it stopping private individuals from evading taxes which is also a form of corruption? Think about the traffic police case. Would I rather pay the bribe or go through the entire process of procuring my license back?

“Why not elevate the Lokpal by making it a constitutional body accountable to the parliament like the election commission of India?”

The three pillars of the constitution for the proper governance in India are the administration, the legislature and the judiciary. Now within the constitution there are provisions to ensure that these three pillars are accountable to one another. The administration is accountable to the legislature and judiciary through various processes such as RTI. The legislature is accountable to the judiciary as a bill can be called for judicial review by the Supreme Court. The judiciary is accountable to the legislature as it is the legislature that appoints and impeaches the judges of the court of law. Who is the Lokpal accountable to? Are we naïve enough to believe that a body having unchecked power over those who are supposed to be in power is not going to get corrupt? I maybe too pro-constitutional so pardon me, but why should any institution made to check corruption and “cure our democracy” be above the constitution that lays the very foundation of this democracy? When no Member of Parliament, no Prime Minister, no IAS officer and no Supreme Court judge is above the constitution then why should the Lokpal be given this special status. If Lokpal is the answer to corruption it at least must be answerable to somebody! Giving it unchecked powers certainly undermines our constitution which has laid the foundation of our democracy.

“India’s biggest achievement is our democratic system. It is the life force of our nation”

The entire Anna Hazzare movement has laid the precedent of undemocratic processes and tested the tolerance of our government. For the first time in the history of an independent India, bypassing all the rules of procedure for conduction the house, the Honorable Speaker, used her discretionary powers to get the house to discuss the Jan Lokpal and more importantly the Anna Hazzare movement. What was the outcome? Victory against corruption or a three point resolution stating the assurance that the parliament will positively think about the three points laid down by Anna Hazzareji, Wait! Both the outcomes do not sound the same to me. There is no guideline as to how this thinking would happen. There is no time stipulation for anything. This is meaningless. Ofcourse, if you do not follow the rules of procedure, if you wish to bypass the standing committee to get a bill to the table, if you wish to bypass the entire democratic process laid down by the constitution then well, the outcome is not going to be very positive as it has been achieved through undemocratic means in a country which takes pride in being the largest functioning democracy in the world.

(The content presented within quotes in italics is from Mr. Rahul Gandhi’s speech in the Lok Sabha on 26^th August 2011. The entire speech is easily available on the web. I am not supporting anybody here, but yes I do support some ideas. )

The Union Law Minister on the Jan Lokpal Bill- A Must Read

2011-08-21T21:51:00.000+05:30

Jan+Lokpal+Bill+would+lead+to+a+police+state%3A+Salman+Khurshid

Jan Lokpal Bill would lead to a police state: Salman Khurshid

Soma Banerjee, ET Bureau Aug 20, 2011, 07.13am IST

India will become a police state if Anna Hazare 's version of the Lokpal bill is accepted, according to Law Minister Salman Khurshid . The suggestions made by Hazare and his team for creating a tough anti-corruption institution go "against the federal fabric of our country", says Khurshid. Although it is not the best of times for a minister to hold forth on governance - when his government is facing a hostile opposition in the House and a belligerent civil society outside - Khurshid is candid about the government's hard line despite popular protests. In a frank conversation with ET , Khurshid talks about his government's position, its strategy and views on the Lokpal. Excerpts:

Team Anna has demanded that it is only the Jan Lokpal bill that can address the issue of corruption in a meaningful way. What are main objections to the bill?

We cannot accept what is being demanded as the Constitution does not allow us to do so. Accepting those provisions would mean transforming the democratic set up to a police state. The Jan Lokpal Bill calls for officers at every administrative level who'll carry out investigations and prosecutions. This would lead to creation of a police state. Second, they (Team Anna) want the Lokpal Bill to automatically come into effect at the state and central level.

This goes against the federal fabric of our country. They wanted death penalty for corruption, which they have now toned down to life imprisonment. Is that what our democracy is all about? They want the judiciary and the prime minister to be under the ambit of the Lokpal. We have suggested a judicial commission for the judiciary.

Team Anna wants the government to withdraw the current bill and introduce the Jan Lokpal bill instead. How will you break this logjam?

We hope to have a robust debate in the Parliament and appoint a strong Lokpal. The standing committee, or opposition members, can suggest amendments and these can be debated. On the demand that the current bill be withdrawn, I am not too sure if that is the way forward. Bills are withdrawn and sometimes they lapse but there are no instances where the government is forced to withdraw a bill under pressure.

Do you think the govt'strategy to disallow the protest failed?

I do not think we were wrong in doing what we did. We had been in discussions, we had hoped that they would see reason. There were other options too. For one, we could have allowed him (Hazare) to fast and lead demonstrations and waited till the matter went out of control. Who would have been responsible for not being able to handle the situation? The other would be to surrender and abdicate our responsibilities and allow them to play our role as lawmakers.

Can any MP agree to that? In hindsight, we have been able to get Anna & Co to see some reason. Their initial plan was 'fast unto death'. Then it changed to indefinite and, as of now, the fast is for a fortnight. Second, they have accepted medical supervision of Anna's health and Dr Naresh Trehan will be a part of the medical team. We will wait 'n' watch. We have to get down to a dialogue.

Don't you agree that the govt's failure to tackle the situation provided a ready platform to the opposition parties?

The opposition parties cannot deny the importance or the role of the Parliament. I do not think any one of them would be willing to surrender their responsibilities as lawmakers. How can a senior leader like Advani compare Anna being in jail to Emergency? Anna was held in jail for only eight hours. Comparing the situation to Emergency is to mock at the sacrifices during Emergency. Anna has stayed at Tihar Jail on his own will for three nights.

Do you think the government failed to read the pulse of the people?

Anna and Co are talking of a 40,000-odd crowd in one city. The Congress party has pulled crowds for decades together. One would want to know who all constitute the crowd. Do they know what they want? Do they want a police state? And, if they don't, then are they not being farcical? They need to understand what they are protesting against. Will the Lokpal end all corruption?

But won't you agree that corruption is a big issue today?

Yes, and we are working towards weeding out corruption. The Lokpal is a significant legislation in this regard. But this is not only about corruption. People today are more aware, empowered and demanding. They want a better quality of life. Economic prosperity and a vibrant democracy have helped increase awareness. Today, citizens know about their rights. The Land Rehabilitation Bill is a perfect example of this.

Proud of Our Democracy

2011-08-21T08:02:00.001+05:30

Anna Hazzare is hailed today as democracy’s hero. Yes, he is the champion of democracy for he has managed to vividly explain the concept of democracy, at least to me. Democracy is a system that gives you the right to undemocratically protest against a government you yourself elect and not face any severe consequences for it. In the letter Mr. Anna Hazzare wrote to our Prime Minister, Dr. Manmohan Singh, he stated the purpose for his fasting as- “What are we asking for? We are not saying that you should accept the Bill drafted by us. But kindly create a credible platform for discussions, a joint committee with at least half members from civil society suggested by us”. Now, that was achieved some time ago. Yet, “not happy with the outcome” Mr. Anna Hazzare now has started his second ‘fasting’ stint with the intention of making this the Second War of Independence. The step-by-step blackmailing process has been invented!

The Freedom movement of today is here. Freedom to do what? Freedom to emotionally blackmail the government into doing exactly what you want it to do. He compares himself to the freedom fighters of British India but he forgets that they never emotionally blackmailed the British crown (not that British crown could ever be emotionally blackmailed) but fought valiantly and they sought to fight the imperialists and colonialist as democratically as they possibly could. Well, isn’t then the scenario today just the opposite?

Mr. Anna Hazzare is compared to the father of our nation. Well, then possibly there has been a slight error there. Gandhiji never ridiculed the British in his call for India’s freedom and progress. He fought with the intention of winning independence but not with the goal of finishing the British and that is a major difference. Mr. Anna Hazzare threatening tone against the Congress Government cannot be compared to Gandhiji’s moving speeches to encourage people to join him. If the British agreed to the terms of the INC back then, Gandhiji would have applauded them rather than presenting them with a further set of demands. Furthermore, Gandhiji did not think twice before calling off the Non-Cooperation Movement due to the unrest especially the Chauri-Chaura incident but Anna Hazzare himself has given the war cry and causing public disorder. People forget that loosing order back then would be acceptable as we were repressed and ruled upon by a foreign entity. But loosing order today when the government has been democratically elected by the people themselves and we are ruled by our chosen representatives, has hurt India’s image as a stable democracy.

Due to our liberal constituent assembly and especially its drafting committee, we have the right to free speech and expression. But there is also the section 499 of the Indian Penal Code which defines the law of defamation as exposing a man to hatred, ridicule or contempt. Hasn’t that been violated by team Anna on a public platform? Also, the freedom to assemble guaranteed by Article 19(1)(b) under Fundamental rights has been quoted many a times by some of the ignorant supporters of Mr. Anna Hazzare but they forget that there are limitations to this right. When the question of public order arises then assemblies in question can be considered unlawful and the police had warned Mr. Anna Hazzare about the same. Were they wrong in arresting him then? Can anyone ignore the instructions of the police and break the law and get away with it then? Are we not ridiculing our laws and our constitution then?

Stating the facts of what transpired on 16^th August 2011, the Prime Minister said “On the evening of August 15, 2011, Shri Anna Hazzare, through public statements, made it clear that he and his supporters would converge at Jai Prakash Narayan Park and defy the prohibitory orders under section 144 CrPC. Yesterday morning, Delhi Police reviewed the situation. Delhi Police came to the conclusion that it was clear that Shri Anna Hazzare and his supporters would commit a cognizable offence and there was a likelihood of a breach of peace. Hence, Shri Anna Hazzare and six others were arrested, as a preventive measure, under section 151/107 CrPC. They were taken to the Delhi Police Officers' Mess at Alipur Road and, subsequently, produced before a Magistrate. Delhi Police did not seek the police remand of the arrested persons. The Magistrate offered to release the arrested persons on their personal bonds subject to the condition that they would undertake not to violate the prohibitory orders. However, Shri Anna Hazzare and others refused to give such an undertaking or furnish personal bonds. Hence, the Magistrate remanded the arrested persons to 7 days judicial custody. Meanwhile, during the course of yesterday, about 2,603 persons were detained in Delhi when they were proceeding to or were in areas where prohibitory orders under section 144 CrPC were in force. All of them were released later in the evening yesterday.”

What the media conveniently telecasted was- “Anna Arrested” and a few hours later “Anna to remain in judicial custody for seven days”. The fact that he refused to pay the bond and hence the law left the magistrate with no option but that of judicial custody was never telecasted. Then Mr. Anna Hazzare was raised to a heroic stature and the news of him refusing to pay the surety bond was released. Well at least that he learnt right from Gandhiji. That however does not justify anything. In his speeches around the time of his second fast (16^th August2011), Mr. Anna Hazzare has been using the term Congress government instead of government infusing a doubt in my mind of the integrity of his cause. But I give him the benefit of the doubt here.

I am not against the cause he is putting forth but yes, I am against his actions and the implementation of his “Gandhian ideology” in today’s democratic India. The corruption affecting the common man the most is the one it faces from those in the administration and not the government which is strictly the executive. The traffic police constable who takes a bribe or the rationing officer is not the government and neither do they change every five years like our government. We need to attack that first for it affects our common man more and the Lok Pal bill does not do anything about it. If the grass-root is clean only then can we have the hope for a cleaner top brass. And one Lok Pal bill working top down will not help us. So yes, Wake up! Fight corruption! But in the right direction.

Yet again I state, I am not against Mr. Anna Hazzare’s cause. His idea of a corruption free India is a one shared by all the citizens of this magnificent nation but is his execution appropriate in a democratic setup? How does any citizen have the right to introduce a bill in the Lok Sabha? We have a legislature formed by the legislators we have elected ourselves for this purpose. And now the executive itself had introduced the bill in the Lok Sabha. What more should we ask for? Panchayati Raj works okay when we have a village with a population of thousands. The concept of direct democratic form with a population of over a billion is a bit impractical and inefficient and you don’t have to be a rocket scientist to realize this. If the Jan Lokpal comes into force then we will have a police state instead of a democratic one. And is there a guarantee that the Lokpal will not be corrupt? I do not think so.

I am proud of our democracy and our government for tolerating this movement with a calmness and composure. Bravo!