Rahul Deodhar

All links

noreply@blogger.com (Rahul Deodhar) — Tue, 12 Nov 2024 23:51:00 +0000

These are the links to all the post on this blog. This is to make it easier for the reader and me to find old articles.

▼ 2021 (1)
- ▼ March (1)
  - Head over to RightVIEWS

▼ 2020 (6)
- ▼ May (2)
  - Why is there is no lending in crisis?
  - Will US Dollar collapse? What will be an alternate...
- ▼ March (1)
  - COVID-19 Corona Virus - What we need to know.
- ▼ February (2)
  - What is the difference between NRC and NRC Assam?
  - CAA Video series
- ▼ January (1)
  - Citizenship Amendment Act

▼ 2018 (37)
- ▼ September (2)
  - Oil trade routes and India's geo-political advantage
  - Can only US markets go higher in the face of tarif...
- ▼ June (2)
  - Interesting Readings 11 June 2018 = Is Debt Jubile...
  - Interesting Readings 01-June-2018
- ▼ May (2)
  - Interesting Readings May 14 2018 - Development Fin...
  - My two favourite HR people!
- ▼ April (7)
- ▼ March (15)
- ▼ February (7)
- ▼ January (2)
  - 2018: Images from the crystal ball
  - Knowledge improves Risk Mitigation

▼ 2017 (24)
- ▼ December (1)
  - Innovations from Big firms vs small firms and crea...
- ▼ November (2)
  - Law and Order - The missing reform
  - Tax - Analysis of Banking Transaction Tax
- ▼ June (1)
  - Farmer suicides and loan waivers - can we solve it?
- ▼ March (3)
- ▼ February (10)
- ▼ January (7)

▼ 2016 (31)
- ▼ December (8)
- ▼ November (1)
  - Black Money & Demonetization
- ▼ October (7)
- ▼ September (3)
- ▼ August (10)
- ▼ July (1)
  - Reforming Indian Agriculture
- ▼ June (1)
  - Yeah! On Brexit!

▼ 2013 (19)
- ▼ December (4)
- ▼ October (2)
  - Happy Dassera - Why we Indians buy Gold during Das...
  - Money Supply - when and how QE becomes dangerous
- ▼ June (5)
- ▼ May (2)
  - QE and the priming of the World Economy
  - What is a fair Pay?
- ▼ April (2)
  - Digitizing Permission marketing
  - The Role of Regulators and Regulation
- ▼ February (1)
  - Risk Adjusted income and certainty of employment
- ▼ January (3)

▼ 2012 (57)
- ▼ December (1)
  - 2013: Images from the crystal ball
- ▼ November (2)
  - The story behind my book "Understanding Firms"
  - Yen Vs. RMB - China crippling Japanese companies?
- ▼ October (1)
  - What is speculation?
- ▼ September (1)
  - World wide factory Activity
- ▼ August (10)
- ▼ July (19)
- ▼ June (9)
- ▼ May (3)
- ▼ April (2)
  - S&P putting India rating outlook to negative - com...
  - Deploying Public Assets (spectrum, coal blocks, etc.)
- ▼ March (3)
- ▼ February (2)
  - Jeremy Grantham knows we were warned!
  - Commodity valuation
- ▼ January (4)

▼ 2011 (73)
- ▼ December (8)
- ▼ November (9)
- ▼ October (2)
  - Can China become a Consumer-economy quickly?
  - Understanding the behaviour of the US Dollar
- ▼ September (3)
- ▼ August (4)
- ▼ July (8)
- ▼ June (15)
- ▼ May (4)
- ▼ April (4)
- ▼ March (6)
- ▼ February (4)
- ▼ January (6)

▼ 2010 (60)
- ▼ December (8)
- ▼ November (6)
- ▼ October (8)
- ▼ September (1)
  - Roller coaster - Welcome to the first loop
- ▼ August (10)
- ▼ July (11)
- ▼ June (7)
- ▼ May (2)
  - The Search for Growth
  - West - decline or browning
- ▼ April (5)
- ▼ January (2)
  - China Bust?
  - Market View and trading strategy from Vitaliy Kats...

▼ 2009 (60)
- ▼ December (6)
- ▼ November (3)
- ▼ October (2)
  - Telecom Companies growth models
  - How Cities Develop?
- ▼ September (3)
- ▼ August (7)
- ▼ July (8)
- ▼ June (4)
- ▼ May (2)
  - A New Banking System
  - An increased (though very small) probability for War
- ▼ April (6)
- ▼ March (11)
- ▼ February (2)
  - Surviving the current crisis
  - Henry Ford v/s Greg Mankiw and real arguments for ...
- ▼ January (6)

▼ 2008 (55)
- ▼ December (7)
- ▼ November (9)
- ▼ October (12)
- ▼ September (5)
- ▼ August (5)
- ▼ July (4)
- ▼ June (5)
- ▼ May (1)
  - Negative equity on cars - is it damaging?
- ▼ April (2)
  - Financial crises and Recession risks
  - Dollar headed for a decline?
- ▼ February (2)
  - Asset prices rising - Is trouble brewing?
  - US indebtedness - The scope of the debt trap
- ▼ January (3)

▼ 2004 (2)
- ▼ November (1)
  - Organisational Roles for 21st century Business
- ▼ October (1)
  - Smart Cards

Head over to RightVIEWS

noreply@blogger.com (Rahul Deodhar) — Tue, 09 Mar 2021 09:24:00 +0000

Today I am announcing the launch of RightVIEWS media. It's flagship product is the YouTube channel RightVIEWS and we also have Podcast and website to go along with that.

The idea is to create a long-form content on Podcast for the moment and use the blog for written content.

On the Channel itself, I aim to create a series of videos on particular subject rather than one single long video.

This is the start and we have 49 subscribers, 38 videos and 20 podcasts. Lets see how we can expand it. Head over to rtvws.com to learn more.

Why is there is no lending in crisis?

noreply@blogger.com (Rahul Deodhar) — Mon, 11 May 2020 07:11:00 +0000

On LinkedIn, Callum Thomas has shared a post detailing tightness in lending standards and gradual shifting to tight credit conditions.

Lending standards tighten at the exact wrong time in a crisis. Also in a crisis the ratings get downgraded en masse. When we want banks to lend, banks do not want to lend. When we want banks to stop lending, banks get busy making risky loans. This is one problem of banking regulation that has not received enough attention.

Markets and particularly rating agencies need to appreciate the difference between Macro risk (where all aspects of the economy are impaired) v/s corporate risk (where particular company suffers impairment because of its own actions or inactions).

Credit cannot be pushed - it needs to be pulled. To achieve this, a better mechanism is interest subvention. It seems to be a much better tool when macros risks are prevalent.

An SPV which guarantees interest rate up to X% (ranging from 30-50% of lending rate - so for India it will guarantee 3% interest cost for US it could 0.75%) it should cause firms to pull credit and deploy it for productive uses.

Rahul Prakash Deodhar, Advocate, Bombay High Court is also a private investor. He can be reached at rahuldeodhar@gmail.com, on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms"

Will US Dollar collapse? What will be an alternate currency? What about Gold?

noreply@blogger.com (Rahul Deodhar) — Wed, 06 May 2020 12:56:00 +0000

At this point I am not sure Dollar collapse is closer.

A dollar collapse needs to have three points -

The fundamental weakness in USD (we have this more or less)
a World not reliant on US consumer demand
A strong challenger

Last 2 conditions are not met - at least not yet. Euro has its flaws and needs to iron those out before it can become a challenger. Yuan will not be a challenger. SDR is closest option we have but there are issues there too. I am not confident of the blockchain currencies that exist presently.

IF Dollar is really stressed we may go back to a gold-peg rather than other currencies. In fact, gold peg may be quite a good Fed policy for the short term.

If we correct the SDR structure then eventually even the US would love to have a 2-level currency system.

Previously I have discussed views on US Dollars here:
Dollar, the International Currency system and the Ghosts of Connally

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

COVID-19 Corona Virus - What we need to know.

noreply@blogger.com (Rahul Deodhar) — Tue, 03 Mar 2020 13:58:00 +0000

I have uploaded my first video on Corona Virus what we need to know. Please watch and subscribe to the YouTube Channel. Also follow Right Views on Twitter (http://twitter.com/rtvws) and Instagram (https://www.instagram.com/rtvws/)

The video is accompanied by info pack that can be downloaded here.

What is the difference between NRC and NRC Assam?

noreply@blogger.com (Rahul Deodhar) — Fri, 28 Feb 2020 05:12:00 +0000

I made a video explaining the same. It includes a chart explaining the difference which is detailed below.

Here is the video:

I made a chart of the difference between NRC and NRC of Assam:

Here it is:

CAA Video series

noreply@blogger.com (Rahul Deodhar) — Thu, 20 Feb 2020 05:22:00 +0000

A short video series explaining CAA. I wanted to keep the videos less than 5 mins so that easy to view.

Citizenship Amendment Act

noreply@blogger.com (Rahul Deodhar) — Wed, 29 Jan 2020 04:40:00 +0000

Even those living under a rock have heard about CAA – The Citizenship Amendment Act. 2019. They have heard vocal and emotional arguments, protest and all sorts of confusing messages. In general, Indian citizens have nothing to do with CAA. The question is therefore what about CAA has evoked the protests? Is the government really discriminating against Muslims? Is the government allowed to discriminate? What about Article 14 – equality before the law? Let us answer these legally and logically.

How to get Indian citizenship?

Indian Citizenship Act allows for 5 categories of citizenship –

Citizenship at the time of independence, simply put, was given to all people living in undivided India who chose to remain in India.
Citizenship by birth is not that easy. From January 26, 1950, up to July 1, 1987 people born in India became citizens of India. Those born between July 2, 1987, but before December 3, 2004, became citizens only if either parent was a citizen of India. A person born on or after December 3, 2004, is a citizen only if both parents are citizens OR one is a citizen and other is not an illegal immigrant at the time of birth.
Citizenship by descent can be claimed by people born outside India. A person born outside India before December 10, 1992, can claim citizenship by descent, only if his father is an Indian citizen. If a person is born outside India, between December 10, 1992, and December 3, 2004, can claim citizenship if either parent is a citizen of India. After December 3, 2004, if you are born outside India, you can only claim citizenship by descent by registering at the Indian embassy/consulate.
Citizenship by registration is available to those people who qualify in the first 3 categories but are not Indian citizens because they are citizens of other countries. These people MUST renounce their citizenship before they become eligible to become Indian Citizens.
Citizenship by naturalization is a category open for everyone else provided they are not illegal immigrants or descendants of illegal immigrants. In other words, illegal immigrants or their children CANNOT ever become Indian Citizens after 2003. Even if illegal migrants marry an Indian citizen their children cannot become Indian citizens.
Citizenship by incorporation of a territory is when a state or country joins India, its citizens will automatically become citizens of India on the date of incorporation of the territory. These citizens do not have do clear any hurdles to acquire citizenship. This was primarily used for accession of princly states into India.

Is getting citizenship a right of non-citizens?

Simply put, only people born in India (category II) and people of Indian descent (Category III) but with restrictions described above have a RIGHT to be granted citizenship. They can demand to become citizens.

Others can apply for citizenship, whether to grant them or not is the discretion of the government. Citizenship by registration which applies to those born in India or are descendants of Indians but are not Indian citizens cannot claim a right to be given citizenship. Whether to give them citizenship is at the discretion of the government officials. The same is the case with citizenship by naturalization. Just because you lived in India for more than 12 years does not give you a right to be granted citizenship.

Illegal migrants, their children and even those children of illegal migrants whose spouse is an Indian, all, are specifically disqualified from getting citizenship.

Law relating to migrants and refugees

When it comes to migrants and refugees the laws applicable to them are derived from India’s commitment to the United Nations Charter of Human Rights read along with Indian laws (i.e. Constitution, Indian citizenship Act, Foreigners Act etc.).

In turn, UN Human Rights are centered around (1) Declaration on the Human Rights of Individuals who are not nationals of the country in which they live - Adopted by General Assembly resolution 40/144 of 13 December 1985; (2) 1951 Convention Relating to the Status of Refugees along with 1967 Protocol Relating to the Status of Refugees and along with Resolution 2198 (XXI) adopted by the United Nations General Assembly. These are also summarised in the 2006 publication of Office of the United Nations High Commissioner for Human Rights titled The Rights of Non-citizens.

In common language, legal migrants and refugees have a revocable right to residency. However, they have no right to get citizenship. Whether to give them citizenship or not is up to the government.

Are migrants entitled to Article 14 -equality before the law?

Many commentators have unequivocally stated that Article 14 applies to migrants as well. However, it is not a clear case. Based on a reading of all the documents, migrants are required to be treated equally before a court of law. They have some fundamental rights, chiefly right to life and property (subject to restrictions), etc. The UN High Commissioner’s publication mentions that State may discriminate for legitimate reasons and further allows states permits States to draw distinctions between citizens and non-citizens with respect to two categories of rights: political rights explicitly guaranteed to citizens (but not to migrants) and freedom of movement (not granted to illegal migrants).

Further, migrants, legal or illegal, cannot claim a right to be citizens. In fact, illegal migrants or refugees cannot become citizens of India. The Citizenship Act actively forbids them from becoming citizens.

Then what happens to illegal migrants?

There is no provision to give citizenship to any illegal migrant whatever be their religion. In fact, once you are established as an illegal migrant you are disqualified from getting citizenship. In fact, even if illegal migrant marries an Indian, s/he cannot be given citizenship. Their children can NEVER become citizens of India.

When the laws are read with UN HR resolutions and the Foreigners Act, India is required to deport illegal migrants to the country of their origin. They can also be deported to other countries provided they will be safe in those countries and that country is willing to accept them. Law allows for keeping illegal immigrants in detention centers or they may even be prosecuted in accordance with the Foreigners Act.

India can only deport all non-persecuted illegal migrants. Those facing persecution cannot be deported to their country of origin. All illegal migrants have a right that prevents the host government to deport them to a country where they will face persecution or abuse.

The net effect is that the persecuted illegal migrants cannot become citizens (because of the law) and cannot be deported. It implies that persecuted illegal migrants cannot be deported because of our commitment to UN human rights.

However, UN Human rights resolutions and Indian law require the government to deport illegal migrants who are not persecuted. Alternatively, they can be prosecuted under the Foreigners Act or detained.

In all these aspects the religion of the illegal immigrant is immaterial, Indian laws do not differentiate between illegal migrants based on religion.

Enter the CAA

The CAA grants a right to illegal migrants who are facing religious persecution only in 3 Islamic countries, Pakistan, Bangladesh and Afghanistan, to claim citizenship provided they have entered India before 2014. The act creates a right in favor of those who are persecuted that they may seek citizenship.

The act is a manifestation of promises made in 1947 to the minorities of undivided India. To be clear, the understanding was that Pakistan would give citizenship to persecuted Muslims of India and India will give citizenship to all persecuted minorities (at that time this group was primarily Sikhs, Jains, and Hindus – Christians were persecuted later).

Why not make minority migrants citizens under current law?

This question has to be answered in two parts.

For illegal migrants, before CAA, there is no provision in current law to give citizenship to them or their descendants from any community. If they are not persecuted, they have to be deported. If they are persecuted, they stay here as migrants. After CAA, only the persecuted illegal migrants from 3 countries who are already in India before 2014 get to apply for citizenship. Since they could not be granted citizenship, an act of parliament was required.

For legal migrants, all religions can apply. In this case, CAA merely lowers the bar for these migrants provided they are persecuted in their country of origin. This provision is simply like setting up a separate queue for wheelchair or persons with disabilities, mothers with infants etc. However, even this part, since it concerns citizenship could not have been done without an act of parliament.

Why not include Ahmadiyyas etc. who are facing persecution?

This is a complex issue and relates to all persecuted minorities - Ahmaddiyas, Baloch, Sindhis, Tibetians, etc. There are diverse categories of reasons for this, some arise from the legal aspect of partition itself, others are emotional, some are fundamental, some are practical. I am listing only the logical ones here. When you read the description below, you may not agree with a few and agree with others. But taken together, it is not possible to accept them.

First, at any point, in any country, a lot of classes of people claim to be persecuted. Landlords have been persecuted, landless have been persecuted, some are persecuted based on their sect, others because they support some political party etc. In the three countries, too many classes of people are facing persecution. Ahmadiyya, Tribals in Bangladesh, Baloch, Mohajirs, Sindhis, liberal Muslims in Taliban held areas, etc. are known to be persecuted. Only some of these are illegal immigrants. Can India accommodate all of them?

Second, legal recognition of persecution differs from actual persecution. If the law of other countries discriminates clearly then you can recognize it. However, if the law does not discriminate but provides for a remedy for any discrimination then another state cannot take cognizance of it even if in reality there is discrimination. Such recognition will become interfering in other countries' affairs. Thus, if Pakistan, Bangladesh, and Afghanistan had not amended their constitutions to become theocratic Islamic states there would not have been a legal basis to enact this law. Even today, there is no legal justification to provide for Sri Lankan Hindus, Tibetans, or Rohingyas. If, however, China or Sri Lanka were to pass a law against Tibetan Buddhists or Sri Lankan Hindus, there will be an argument for seeking a CAA for accommodating these refugees.

Third, the law does not drive the persecution of many of these groups. These groups are persecuted DESPITE the protection of the law. However, non-Muslim migrants will have no such future possibility since the constitution of these countries does not protect these minorities. These religious minorities are therefore condemned BY their law - by their constitution itself.

Fourth, the basis of partition was not a referendum* but it was premised on separation of areas of population-based on religion. The partition was negotiated by Congress, Muslim League and the British, there were several ambiguities. However, there was one clear representation on which partition was founded – that Muslims do not identify themselves through sects and regions but only through religion and that is why they want separate land. The Ahmadiyyas, in particular, were instigators of partition and actively supported the partition of India and UN resolution on Kashmir against India. Similarly, Rohingyas were keen to separate from then Burma and join East Pakistan. This peculiarity prevents India from acknowledging separate sects including Ahmadiyyas (and further within Ahmaddiyas) within Pakistan, Bangladesh or Myanmar.

Fifth, giving citizenship to persecuted citizens under various classes within former undivided India opens pandora’s box. Will we give citizenship to Baloch? Sindhis? This has the potential to unravel the partition itself. In my opinion, if we get land along with the people, India should have no problem accepting these LEGAL migrants as citizens in the future.

Sixth, you have to also consider how many persecuted people exist illegally in India. As of now, there are no data on illegal Ahmaddiyas in India. Most Pakistani illegal migrants are Hindus and Sikhs. So the Ahmaddiyas in India are legal migrants and they have a regular mechanism to be assimilated into Indian citizenship.

Finally, you cannot promise citizenship in the future to any group of persecuted minorities coming in illegally in the future after 2014 - Ahmaddiyas or even Hindu, Sikh, Jain, etc. All of them including Hindus etc. will not be given citizenship. This is done so as not to encourage persecution of these minorities in their respective countries.

In Sum

The CAA is a mechanism to handle the status of part of the ILLEGAL immigrants. It refers to those illegal migrants (the minorities) who cannot be repatriated (UN laws) and are condemned to live in India forever. CAA makes these persecuted ILLEGAL migrants only from 3 countries into LEGAL persecuted migrants.

LEGAL migrants from all over the world can apply for Indian citizenship under category V. There is no restriction on religion – ALL religions and categories (LGBTQ, etc.) and can be granted citizenship. They have to wait for 11 years before they can apply. For LEGAL persecuted migrants from 3 countries CAA reduces the waiting time to only 5 years.

Thus, CAA has nothing to do with LEGAL migrants and ABSOLUTELY nothing to do with Indian citizens. It also does not encourage illegal migration as a clear cut deadline (past deadline) means no future illegal migrants will be granted citizenship.

* The vote in favour of Muslim League was interpreted as a referendum. However, Muslim League and Jinnah himself were vocal about separate land. Also, Referendum was held in Sylhet and North-West Frontier Province. Both created enormous problems. But that is separate history lesson.

References:

The Citizenship Act 1955
The Citizenship (Amendment) Act 2003
The Citizenship (Amendment) Act 2019
The Foreigners Act 1946
Declaration on the Human Rights of Individuals who are not nationals of the country in which they live, Adopted by General Assembly Resolution 40/144 on 13/12/1985
The Rights of Non-Citizens published by Office Of the United Nations High Commissioner For Human Rights, 2006
1951 Convention Relating to the Status of Refugees – UNHCR
1967 Protocol Relating to the Status of Refugees – UNHCR
Resolution 2198 (XXI) adopted by the United Nations General Assembly
Muslims of Burma – Moshe Yegar
Sri Lankan Tamil Migration and Settlement: Time for Reconsideration
About Burma: British conquest of Burma begain in 1824 with first Anglo-Burmese war. The conquest was complete in 1885 with exile of King Thibaw. Burmese province was responsibility of Government of India. With the Government of Burma Act 1935, separate Burma from India.
Rohingyas and the unfinished business of partition
The Misunderstood Roots of Burma's Rohingya Crisis
Ahmadiyyas were at the forefront of creation of Pakistan, an Ahmadiyya Unit fought against India in Kashmir in 1947-48
A Brief History of Ahmadiyya Muslim Community [ Refer to Advice for Muslims in India]
Zaheeruddin v State [persecution of Ahmadiyyas]
Hadi, Abdul. (2015). Injustice and Persecution: Forced Migration of Sindhi Hindus in Pakistan. Mediterranean Journal of Social Sciences. 6. 10.5901/mjss.2015.v6n2s5p11.]

[Updated with references]

India Growth Model 03: Fix-Contest-Leapfrog-Prepare Growth Model for India

noreply@blogger.com (Rahul Deodhar) — Wed, 22 May 2019 05:57:00 +0000

Indian growth model must have various components addressing local AND global demand. The window of opportunity is short, we need to develop faster. The growth needs to come from both public and private sector and must utilize the Indian human resources. I propose a four-way Fix-Contest-Leapfrog-Prepare model for growth.

Fix

For basic infrastructure and basic capacity building there is enough capital available globally and that capital is seeking low returns which is good.

We need to continue to fix basic infrastructure, from ports, roads, power, housing, etc. to law and legal systems, education, defense to modern infrastructure like telecom and digital infrastructure etc.

We need to continue the cleanup that began in 2014 which mean reformative laws need to be cleaned and reworked for example, Insolvency and Bankruptcy Code, GST Act, etc. needs to be shepherded through the legal institutions that are trying to muzzle it.

However, the most important part of this strategy is to create a proper social security framework. What demographic dividend we envisage, will turn into a demographic nightmare in about 40 years. The problems faced by pensions, medical insurance, health insurance etc. In the developed countries like US, Japan, Europe etc. Signal potential pitfalls for the Indian economy.

The Fix strategy focusses mostly on government action. While there is ample scope for Public-private participation or for divesting government created infrastructure to investment vehicles, the central focus of this strategy will be driven by government. It requires high quality last mile delivery. The strategy will depend on known and innovative models of government action.

Contest

The Contest strategy is relevant for industries operating currently. The catch-up will involve penetration, locally by global companies and globally by Indian companies, of known business models. It is spread of McDonalds and Sushi across the Indian hinterland. It is also the spread of Vada Pav and Fish curry across the remote corners of the world.

This strategy portends that we will liberalise and open the economy. At the time when trade wars are looming large, this will mean global corporates will focus on India intensifying the competition in the domestic space. This will be quick win for consumers and job creation but a difficult time for domestic industry. However, it is not all bad, things will improve for domestic industry also. Something similar to what we say between 1992-1994 and between 2002-2005 we can hope to achieve. This is domestic battle. Battle for Indian consumers by Indian and global companies.

However, we need to prevent the mistakes and learn from the experience of the world when we liberalise. Thus, we may want to regulate the propogation of Genetic modified foods, or hormonally treated meats etc.

The contest strategy focusses on private players and known business models. The role of government shall remain limited to regulation and monitoring. Coordinated export development strategy is required. This means industrial policy will be as important as Fiscal policy.

Leapfrog

Generating, lasting, fast paced private growth is quite difficult. Particularly at the time when trade wars are looming large where economies will try to protect their jobs and therefore their markets. It will come from those industries where we India can deliver susbtantive and impossible to replicate advantage that will remain exclusively tied to India. This will be the focus of the Leapfrog strategy.

The Leapfrog strategy will focus on IT/ITES, Food, Fashion, Jewellery, Movies, Music, Entertainment, Culture, medicine, among other sectors.

Leapfrog strategy will be driven by innovative private players. The role of government will be limited but innovative interventions. We also need champions for each of the industry clusters working in this area. Dewang Mehta is the name that immediately comes to mind.

Prepare

At the time we are developing this strategy, we need to keep an eye on emerging trends in distributed manufacturing, robotics, artificial intelligence, advances in biology, etc.

These opportunities are for the private sector. In this report we focus on what private sector can do to address these opportunities in the economy and market place and create value. This participation by the private sector will entail some innovative groundwork by the government. We highlight that in later section.

Model in summary

The Fix-Contest-Leapfrog-Prepare Model is meant to limit the role of the Government. It also recognizes that Government is also necessary and required to deliver certain services. Thus, the model is centrist in terms of economic leanings. It is meant to clarify the necessary reform that government needs to undertake and to underline its urgency.

It is also the aim of this model to enumerate some of the many opportunities open for private sector in India. It is the private sector that will create those jobs. The model is meant as a treasure map that hopes to inspire many private sector treasure hunters to go forth and seek this treasure of growth and prosperity for the economy.

It is also important for this model to highlight the nature and extent of coordination that will be required between government and private sector. Both these entities will be required to complement each other so that India can address these opportunities before us. Coordination is more important because, unlike between 2002-2007, the macro environment is volatile.

The Fix-Contest-Leapfrog-Prepare Model will be explained in detail in subsequent sections.

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms"

India Growth Model 02: India needs a new Growth Model

noreply@blogger.com (Rahul Deodhar) — Thu, 16 May 2019 14:00:00 +0000

India needs growth at a time when global growth is sluggish, globalization of trade and supply chains has plateaued and is likely to reverse. These headwinds are challenging for any economy. Therefore, the Indian model of growth has to be substantially different.

Proven business models are broken

Across times countries have deployed similar models for growth. They are based on trade to places that have demand for goods / skills available in your economy. This demand emanates from cost arbitrage or availability arbitrage.

Early Europeans were seeking spices available only in the tropical Asia. At that point in history they did not have much to trade with Asia but Industrial Revolution changed all that. With use of force they were able to maintain demand side and supply side in control and make neat profits. This enrichment of Europe came at the expense of Asia and Africa. The armed control over markets and suppliers allowed Europeans to run a level of protectionism that is unparalleled and hopefully will never be repeated. Nevertheless it represents one model of growth.

In the pre-war era, America developed exporting to war torn Europe. Taking advantage of wage differential, higher risk tolerance thanks to innovative risk mitigation mechanisms, and a healthy domestic demand augmented by immigration, Americans were able to enrich themselves both at the expense of Europe in some cases and also in cooperation with Europe in others. American protectionism was more from the cost side. Using slave labor and forcibly usurping the land and other resources Americans were able to create value. The American growth model was thus based on military industrial complex.

The Post World War II development of Europe was entirely based on exploiting American demand augmented by domestic demand from rebuilding initiatives supported by low cost capital. This time, Europe was not able to run the kind of protectionism that had benefited them earlier. However, they benefited from twin protectionism. Europe enjoyed fortuitous financial protectionism based on low cost of capital thanks to Marshall Plan. It also engaged in currency management to help sustain the development. There were other factors allowing faster growth in Europe - lower population in all of West, new technologies from war for productivity enhancement and solid demand from rebuilding.

The Japanese growth which partly overlaps with European growth was also based on the same premise. Japanese fine-tuned this strategy by self-deprivation and focusing on exports to the West turning it into a protectionist advantage. Japan had another advantage, it did not need to spend on military and defense.

However, this dependency of Japan and Western Europe became unbearable for United States which was operating under the Gold Standard. It lead to abolishing of Gold Standard and start of modern finance driven development era. This is the time when John Connally made his two famous statements - “Dollar is our currency and your problem” and the ever prescient and my favourite “My philosophy is that all foreigners are out to screw us and it’s our job to screw them first.”

East Asian tigers and then China were the first to take advantage of the growth unleashed in this period. Using essentially the same model, these countries relied on pegged exchange rates and export demand to move out of poverty. By the time India joined the party in 1991, this model was quite well understood. The initial quirks were exposed during the South East Asian Crisis. The crisis led to refinement rather than correction of the model.

By 2002-03 this model became so well understood that most of the developing countries started using this model. Over-reliance on consumers from developed world and excessive constraints on domestic demand were norms of the day. This old model of development has finally broken or is in the process of breaking. In effect we will need a new model for growth.

Indian model of growth has to be substantially different. It has to withstand competitive forces right from the word go. India will not have any advantage of protectionism except what naturally accrues to it. Indian model must take advantage of the uniqueness of Indian demand in comparison with other countries. Given that Indian markets are not exactly uniform, India can become the hotbed for innovations that can be exported to the whole world.

The future is hypercompetitive

In the next phase of globalization, we are likely to encounter countries defending their domestic consumer. India has to withstand competitive forces right from the word go. India will face stiff competition winning in the markets outside India. India will not have any advantage of advantages except what naturally accrues to it.

Thus, India will have to fight for the global consumer, some times on unfavorable terms, other times with entrenched players. India will face technological gridlock making innovation costly and product development long drawn. India will also have to face adverse tacit protectionism in the form of unreasonably demanding product/service quality or unreasonable punitive damages from product/service failure.

Within Indian markets too there will be intense competition. There is shortage of consumer demand globally. All the top companies will look to gain from addressing the Indian demand. This competition will be both - an opportunity and a threat. If this competition for domestic market creates jobless profitability then it is threat. If it creates vibrant ecosystem then it is an opportunity. Indian model must take advantage of the uniqueness of Indian demand in comparison with other countries. Given that Indian markets are not exactly uniform, India can become the hotbed for innovations that can be exported to the whole world. Thus, the ecosystem will create competency to win across the world.

In short, while other countries grew by looking outwards, India should grow looking inwards AND outwards. But, how will India grow?

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India Growth Model 01: Introduction

noreply@blogger.com (Rahul Deodhar) — Thu, 16 May 2019 07:49:00 +0000

Two forces help the arduous journey of a nation towards progress. The How force makes us confident to embark on the journey and reduces the risks associated with it through sheer details. The second force is the Where force. It is the lure of the dream of a new tomorrow. That dream makes us turn, it gives us energy, carries us through the tough times and gives our life meaning. A nation that knows its WHERE can bear with any HOW! (1)

I was a bit disappointed with the Niti Ayog released their report titled “Strategy for New India @75”. [Here is the the accompanying presentation.] It was a very detailed HOW. The WHERE is missing - not just from the report but even from discussions, research papers, media. It is as if our WHERE has not been conceived. And that is a problem as the “how” depends on WHERE you are and WHERE you want to go. Without the WHERE, everything seems important and when everything is important, nothing is.

Even now the Where is missing. What does this India of 2050 look like? What do people do in this developed India? Where do they work? Where do they live? What do they wear? What things do they buy? What is their relationship with their government? What is their relationship with other countries? What are they worried about? How are the cities? How is the countryside? We can imagine many questions and paint a picture of India at 2050. It is here we want to go. This is our WHERE.

When we know the WHERE, our entrepreneurs will start gearing up for the challenge. When we know the WHERE, we will know what to prioritise, what to speed up, where can we go easy.

In my mind, I have a WHERE and hence my HOW is a little different. So this effort is to paint a detailed picture of the WHERE and augment the picture of the HOW we have already seen.

This series of posts details my thoughts on vision of new India and how to get there. These thoughts I will compile into a report at the end. At present time, the thoughts come from a broad based thinking on the topic, the final report will differ from this but hopefully not by much.

Notes:

Alluding to the quote “Those who have a 'why' to live, can bear with almost any 'how'.” ― Viktor E. Frankl, Man's Search for Meaning

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Comments on Ray Dalio's post on Monetary Policy 3 and MMT

noreply@blogger.com (Rahul Deodhar) — Mon, 06 May 2019 08:22:00 +0000

Ray Dalio's comments are always well researched and interesting. For starters, I think, Principles for navigating Big Debt Crises is must read. (Its free PDF). His recent post on his LinkedIn blog is about Monetary Policy 3.0 and MMT.

Some fundamental comments about present crisis:

QE only creates a space for fiscal response: Central banks and governments alike misunderstood the role of monetary policy in the 2008 financial crisis. The crisis was different than others we have faced since Great Depression. Per my reading of Keynes (which seems to different than Keynesians and neo-Keynesians both), in such crises, the proper response has to be from fiscal side. The monetary policy merely creates space for the fiscal response or accommodates the fiscal response preventing untoward consequences. The response had to be holistic - a coordinated and sustained monetary and fiscal policy response.
Fiscal policy amplification mechanism is broken: Broken may be a harsh word, we may choose "has become messy" in its place. The point is, fiscal policy needs an amplification mechanism. When government starts infrastructure spending, it needs some real value-creating sector to take it from there and start driving the economic engine. At present we do not have such "real value-creating sector" that can boost employments and wages generally. In 1980s we had tech, in 2000s we had internet, now we need something. In absence of a big driver, we need many small ones. If such capability is difficult to create in one sector it is quite difficult to create in more than one sectors too. The solution is to let inherent advantages play out.
Inherent advantages are muzzled: Inherent advantages have stopped driving international trade since east asian crisis, and at a larger scale with China's entry to WTO. Instead, we have pegged exchange rates (soft/hard/overt/covert), manipulated tariff and non-tariff barriers, and, in general, non-transparent trade policy. Until that is fixed we cannot have trade based on pure competitive advantage.
Small business innovations are indefensible: When people talk of China usurping Intellectual property they usually talk about submarine plans etc. But I am talking of something very basic. Check out new funding projects on kickstarter - innovative shoes, innovative bags, innovative pens, anything that takes your fancy. Just search on alibaba or just wait for few months you will see some products like those (invented by kickstarter entrepreneurs) in the market on mass scale. These products are not sold by those companies who invented them on kickstarter or such platforms. This is IP theft that hurts the most. It removes new business competitiveness right at its infancy.
Trickle-up always works; trickle down some times: Monetary policy practitioners and academic economists in general prefer trickle down economics. But empirical evidence says reverse is true. Trickle-up works all the time. Thus, when there is a choice of bail out, we must lean to lower strata. (A) It is more fair and just, (B) better optics and (C) right incentives. But MAIN reason it works because it balances the bargaining power of both sides. Bail out the top and they lean on to regulation to prevent or constrict trickle down stifling the economy. Bail out the bottom and lo and behold all the incentives align beautifully.
Certainty of employment and wages is the one super-indicator: The best solution to any crisis is to get certainty of employment and wages going, rest follows from that. Today we have almost full employment but it is uncertain. Wage predictability is also uncertain. That's why the lack of demand is so persistent.
Interest Rates are like friction: Too much and too little friction are both bad. Sames goes for interest rates too much is bad, too little is ALSO bad.

Some comments about Monetary Policy 3:

Debt financed Fiscal spending financed by QE: I don't agree with Ray Dalio that this was pursued after 2008 financial crisis. The fiscal spending was essentially going to the same group who could access the QE funds. Yes, there was fiscal deficit and increased fiscal spending and yes there was QE to finance it. But this is exactly the wrong kind of stimulus as I have written since 2009 itself.
Giving $10,000 to one person Vs $100 to 100 persons Vs $1 to 10,000 people: Helicopter money is not easy to design. The behavioral response in each of three cases varies drastically.The range of outcomes possible is mind boggling.
Spending conditions interfere political rights: If I am tasked to spend $10,000 can I give it to someone from my family to pay down her loan? Does that amount to spending? Should I buy something? What thing? These questions are difficult to answer, monitor and control.
A little inflation is necessary: People will spend when they can surely afford it (condition above - certainty of employment and wages) and it will get costlier tomorrow. Inflation is important, zero inflation may not be that great.

The examples of Monetary policy 3.0:

The best part of the analysis is the historical perspective Ray Dalio gives. Sharp readers of this blog will immediately note that there are fundamental differences between the conditions in various situations described and those existing now. That is acceptable difference.

Particularly interesting is the Roosevelt response in 1930s. It still forms the basic template for solution today. However, we are at a slightly different position today than in 1930s. So we have to make more adjustments than Dalio may seem to suggest. [Dalio is NOT suggesting it - it appears simple but it is incredibly complex - politically, fiscally and economically]

In Sum

Do not understand these comments as put down of Ray Dalio (as if he cares what I think!). I admire the man because he is being honest and creating a framework to solve the crisis. Good intentions and honest efforts deserve praise - even if the guy making those efforts is one of the richest.

From my side, I solved this crisis puzzle back in 2009 itself.

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World War 3 Watch 05: China's navy upgradation

noreply@blogger.com (Rahul Deodhar) — Tue, 09 Apr 2019 08:39:00 +0000

How is China modernizing its navy? This article provides some perspective about China's navy modernization.

New ships are being put to sea at an impressive rate. Between 2014 and 2018, China launched more submarines, warships, amphibious vessels, and auxiliaries than the number of ships currently serving in the individual navies of Germany, India, Spain, and the United Kingdom. Eighteen ships were commissioned by China in 2016 alone and at least another 14 were added in 2017.² By comparison, the US Navy commissioned 5 ships in 2016 and 8 ships in 2017. Should China continue to commission ships at a similar rate, it could have 430 surface ships and 100 submarines within the next 15 years.

According to the Department of Defense (DoD), a significant focus of the PLAN’s modernization is upgrading and “augmenting its littoral warfare capabilities, especially in the South China Sea and East China Sea.” In response to this need, China has ramped up production of Jiangdao-class (Type 056) corvettes. Since being first commissioned in 2013, more than 41 Type 056 corvettes had entered service by mid-2018.

[...]

Source: China Power

Further, as pointed out by GPF, the US Naval War College released a research paper worth looking at titled Surging Second Sea Force: China’s Maritime Law-Enforcement Forces, Capabilities, and Future in the Gray Zone and Beyond.

As per the report, China has merged few of its departments that had its own patrolling capabilities into a Chinese Coast Guard. China has also used commercial fishing vessels to further its scouting and minor naval defense capacity. GPF shows this graphic about changes to Chinese Coast Guard.

From GPF.

I remember there is a law that China flagged vessels are required to maintain capacity and design to aid and assist Chinese forces if required. It means these commercial vessels too may be deployed in naval conflict. The scale of Chinese Navy - PLAN and China Coast Guard CCG both needs to be reassessed.

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People are rethinking cities

noreply@blogger.com (Rahul Deodhar) — Thu, 04 Apr 2019 03:19:00 +0000

National Geographic magazine has an issue on urban development. Seems to be a collectible. Here are some important articles I liked:

To build the cities of the future, we must get out of our cars. It has fantastic pictures by Andrew Moore and Robert Kunzig has done great by summarising the developments walk-friendly cities.

It refers to the emerald city planning guide by Calthorpe Associates. You can download it here.

The cities of the future infographic is super awesome.

The related articles also features one of my favourites: Want to visualize inequality? View cities from above. It features pictures by Johnny Miller. The Johnny Miller website is treasure trove of many such pictures.

The development of Tokyo is documented quite well.

The photos feature titled This man spends 8 hours every day commuting. He's not alone. is quite good. In my paper How cities Develop I have explored the commute as distance travelled in acceptable commute time. Those insights seem to be bearing out.

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Socialism or capitalism - Big government is a consequence, Small government an objective

noreply@blogger.com (Rahul Deodhar) — Tue, 02 Apr 2019 03:35:00 +0000

Look at what they do NOT what they say!

Socialism or Capitalism - it is one of the central discussion points these days. Socialist too form a broad spectrum - from Bernie Sanders to AOC to Elizabeth Warren. The capitalist are not yet vocal but many are simply dismissive of the left-leaning neo-politics. But are there really left-right differences? Not too much. And I say that as I look at what they do NOT what they say.

Governments get bigger

The basic aim of government at the formation of Amercian revolution was twofold - Army formed protection force protecting citizens from outsiders AND legislation, police, courts system formed Law and Order for resolving disputes among citizens.

Gradually government came to provide diverse services - education, healthcare, insurance, subsidies, legislation and regulation of various industries. Each of these activities has grown in scale over the past 100 years.

When you want government to take up more responsibility then you will end up with a big government.

Big government = MORE TAXES

First objective of taxes is to pay for the government. In some countries the salary expenditures of government account for more than 50% of the total expenditure of the government. This is not counting the maintenance cost and other regular expenses government has to incur just to exist. = MORE TAXES.

Then all these people employed by the government have to do something. Even if they do nothing and just make presentations they consume a lot of money. That requires even more budgets = MORE TAXES.

To make it worse usually they add to procedure and impose cost on society. They prevent innovation. They make it their responsibility to say NO. That stops entrepreneurs before they can create value. It means MORE HIDDEN TAXES.

It all eventually leads to more taxes.

Big Government attracts big responsibility

People have started viewing government as a provider. Governments have encouraged that view. In effect whatever we want to get done, we want government to do it. We would like universal health care, you ask government. You want insurance for all - you ask government.

When governments become bigger, governance becomes difficult. Hence laws turn into fine prints, every step of industry is managed by dozens of legal clauses. Compliance becomes a cost.

Big government is a consequence - Small government is an objective

We need to prune governments regularly. On one level that means improving productivity of government servants. But on other level we need to reinvent our systems to be designed for less government. But remember, no matter what they say, they will increase the size of government AND they will increase taxes AND they will default towards socialism.

To prevent it we must actively reinvent the system to stay on the money. We shall discuss how in subsequent posts.

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World War 3 Watch 04: Indian Defense Equipment strategy

noreply@blogger.com (Rahul Deodhar) — Thu, 14 Mar 2019 07:44:00 +0000

India needs to up its defense game. India is dealing with potential conflicts on two fronts. On both these fronts we have belligerent neighbors engaged in asymmetric multi-dimensional confrontation. Pakistan is more of warfare and China is more of competition. Yet, India must prepare for the potential conflict. And in this we need to improve our preparation substantially.

Airforce

Just cursory look at the Air force in the region will set us back. Pakistan Air Force generally known combat strength is about 500 aircraft. China is about 1600 aircraft. India is about 600. While the numbers are not exactly a way to differentiate - but considering the length of border and our defense requirement India should aim for 2000 combat plane air force.

This means HAL cannot produce 16 aircraft per year. It has to produce 16 aircraft per month. Using private participation we need to improve this number quickly. Second, it appears we need full Rafale deal AND a F16 manufacturing line at the same time.

IAF should also think of getting larger number of combat drones. These drones should be able to manage to fly with manned aircraft. This one manned aircraft (M) -coupled with around 10 drones (D) or more. Thus one mission unit with M-D combination. Then you can add mission units with xM-yD.

These mission units will need to collaborate and coordinate with share intel. That will require a robust ICT interface.

Airforce needs support from ground and space in the form of missiles and information. We should develop mechanism for coordinated launch of missiles controlled by the aircraft pilot herself. We can augment it with coordinator based ground support too.

Army

The future soldier will be an augmented information soldier.

We need to up our game in terms of equipping the soldier with top-class equipment. AK-203 is a step in the right direction. But we need to lighten the soldier and get every soldier a robo-buddy. The buddies could be in multiple form - carrier mules, terrain mapping drones, communication bots and combat drones (sniper buddy). For this we need very intense development in robotics and again the ICT component will also play a role.

We should experiment with augmenting the soldiers with exoskeletons and other techniques to improve battleground performance.

Air-cover has been neglected part of the army. Apache helicopters in air support is essential.

Navy

Future of navy is stealth platforms. As the US stealth ship Zumwalt goes for a maiden mission, China is developing aircraft carrier buster missiles. The Chinese missiles are hyper-sonic and thus almost impossible to intercept. In this context any above surface ship will find it difficult to beat the defenses. Hence reliance of submarine platforms should be increased.

Sub-marine drone tech is actually quite interesting. It can be used on sink-and-forget wait mode. Thus we should be able to plant and move around many depth assets on wait and watch basis. Without humans on board this is (a) easier and (b) safer. It also improves the counter-strike and defense capability. These drones should be easy to manufacture in large numbers and low cost. These drones need not be large they can simply be attachments to ammunition that can help the ammunition to navigate and activate.

Deep sea surveillance and AGAIN ICT is also going to be critical.

So Navy must develop platforms but also develop choking -technologies for anti-ship systems.

Space wars

Space is important front for information wars. The satellites form critical part of the ICT infrastructure we need to deploy across the forces.

Satellites should be able to perform twin functions - jamming enemy satellites and keeping ICT infrastructure working for our forces.

The ability to quickly and rapidly restore downed satellites is very important. We should also explore possibility of smaller satellites that can last only for 5/6 months and then disintegrate. The smaller the satellite the costlier it is to destroy. Also because of size, you can build for redundancy. It is also possible to launch 100 satellites in one launch. These satellites are more relevant for theater coverage rather than country coverage.

Cyber war

Most of modern warfare is quite destructive and hence preventive techniques are more important than remedial measures.Cyber war allows for information and processing delays in enemy retaliation and gives us additional time and information to respond better.

Many times it is better for cyber initiatives to operate in bleeding mode than in crippling mode. Thus, it is better for cyber initiatives to delay the enemy communication rather than cripple it. Thus introducing delays and errors is better than crippling the infrastructure for short time. These cyber initiatives can also provide advanced information about enemy maneuvers. The aim is to destroy combat assets of the enemy.

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Indian Foreign Policy

noreply@blogger.com (Rahul Deodhar) — Thu, 14 Mar 2019 06:55:00 +0000

Since last month's attack on Indian Security forces in Pulwama by the Jaish-e-Mohammad terrorist group, I have been thinking about the changes required in the national policy. Today we get the news that China once again blocked the proposal to declare Masood Azhar, the leader of JeM as a terrorist. In light of these developments here are some thoughts about Indian policy.

Note: Many sound quite conflicting but that is the reality. I miss Narasimha Rao.

With Israel

India MUST announce a proper strategic deal with Israel including multi-faceted cooperation including defense, technology, agriculture, business, banking etc.

We must improve integration with its defense network. A Multi-track developments must take precedence -

Designed in Israel, made in India, (avionics and defense info-tech subsystems)
Jointly designed and made by Israel and India, (missile, interception & drone tech)
Designed in India and made for Israel - (aircraft and other equipment)
Joint Cyber warfare development cell.
We should have joint training - allowing Israeli forces to train in various conditions and set up training with them in Israel too.

We should aim for Agriculture and water management technology collaboration. We should explore policies that should allow Israel-India manufacturing companies to go global - compete across the world. We need to have 3 such companies be global brands like say ikea.

With Russia

India MUST announce a proper strategic defense deal with Russia as well. Russia is a long-term partner and we must improve the interaction with Russia. We must engage with Russians for heavy equipment - fighter aircraft, ships and submarine. We should further the missile development cooperation and aim for joint technology development in defense space.

Economically, we have to help Russia ween itself from Chinese dependence. Russia should be able to stall and deny China without a huge economic cost.

With United States

That India and US are not friends is first the fault of India and then the fault of US. Unfortunately, today there a little bit of mistrust still left.

India MUST have strategic partnership with US and must join the Quad.

This will include setting up bases
We must join the information sharing treaty with US
We must have/develop defense ICT that is interoperable one with US.
We need cyber defense cooperation with Quad.
We need to step-up and take our responsibility in Indo-Pacific.
We also need deeper collaboration and joint exercises between US and Indian defense forces.

With Japan

India must enhance partnership with Japan on following fronts:

Fighter aircraft development
Ship-building tech.
New Drone tech

With Japan, India must set up ventures to develop infrastructure in the Indo-Pacific region. Japan has the capital and technology and India will need to give its man-power.

France
In general, it is not well-understood that France has been a long-standing defense ally of India since independence. More than Britain which somehow finds more sympathy than France. India and France need to improve the cooperation on defense as well as non-defense sectors. We need to improve the status of France in the Indian economic and defense scheme.

South East Asia/ Asean / Asutralia New Zealand
We have to play very pro-active role in this region. We can work on the food side trying to reduce the cost of food and other goods in this part of the world.

About Pakistan
Pakistan will continue to remain an irritant unless we take proactive effort to eliminate the terrorist setup. It can be eliminated by imposing very high economic costs on the Pakistani Army. To this end, India needs to be part of Afghanistan solution. If US cedes Afghanistan to Taliban or to Pakistani Army backed group, we will soon have trouble on Indian soil.

Working in Middle East

India must UNDERSTAND and ACT on the fact that we are Hindu majority country AND we are the largest democracy of Muslim at once. India must use this to influence a lot of things in the Islamic sphere and give it a better direction. We must champion the reforms taken up by other middle eastern countries and overcome the regressive developments taking place.

Africa

India should be able to collaborate with Africa much better than any other country. We should provide the institutional support and help African companies develop as suppliers to India. Japan and other countries will surely help us in this process. We have to showcase a credible alternative to Belt and Road but with good clean reformist credentials.

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Time Travel effect of Debt

noreply@blogger.com (Rahul Deodhar) — Wed, 20 Feb 2019 05:37:00 +0000

Generally in Time Travel movies the actors go back in time to change some minor thing to alter the future dramatically. Debt does this in reverse.

Debt pulls value from future and alters the present in such a manner that more value is created in the future than estimated.

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One problem with Indian capital risk return matrix

noreply@blogger.com (Rahul Deodhar) — Tue, 19 Feb 2019 07:39:00 +0000

One problem with Indian corporate and their regulation can be summed up in the chart below.

Ideally a simplistic capital risk return matrix looks like this (click picture for larger version). In the best of places it comes close to this. Note that this is a simplistic depiction.

Ideal Capital Risk-return matrix

In India, it looks like this:

Indian Capital Risk return matrix

This is law enforcement issue as well as information issue. There is lack of regulation on conflict of interest between promoters and investors (small and big), there are many issues related to corporate governance. There is paucity of information to ratings agencies and these days the rating rigour is under a cloud with intense competition.

The chart also tells us why India does not have a deep bond market. Since my days in CRISIL, we have been harping on the improving the depth of bond markets. But so long as the risk-return profile continues there are no incentives for it.

The dispute resolution mechanism is abysmal. It is particularly unwieldy, long winding, costly and infructuous in the end. This has hurt investment in the country. Once this is fixed India will have unprecedented growth in equity and bond investments.

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How Low interest rate can be bad for small business - 2

noreply@blogger.com (Rahul Deodhar) — Mon, 18 Feb 2019 06:04:00 +0000

In a 2012 post with same title, How Low interest rate can be bad for small business, I had explained mechanics of how small businesses are denied capital BECAUSE of lower interest rates. This was summarized from my book Subverting Capitalism and Democracy. Over the years few readers have asked for further explanation. So here goes.

Demand for projects

Let us look at the following schematic.

Capital Quantum and return

The diagram shows the amount of capital demanded and its possible rate of return. The distribution is made from capital requirements of various businesses of various sizes. The financed part is the blue rectangle. The width of this rectangle and its location is determined by various factors.

Now our experience tells us following details - (1) smaller businesses have higher risk profile whereas larger businesses have lower risk profiles; (2) smaller businesses have smaller quantum requirement whereas larger businesses have diverse capital needs; (3) as a corollary projects with large quantum of capital requirement and low return are dominated by large corporations.

Therefore, let me quote what I said earlier:

How low interest rate leads to mal-investment
A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed.

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures.

Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns.

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy.

The Mechanics

When interest rates are low this rectangle starts more towards the left. This is space where there are weak business models, those that are viable only in low return scenario. This space has irrational mega-projects of large businesses like debt financed share-buybacks etc. With the superior credit rating of large businesses these projects crowd out the smaller businesses.

As the interest rates rise the rectangle is pushed rightwards. In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios.

Are few projects with consortium lending more risky?

The answer to this question is easy if you understand it from banks perspective and not from bank manager's perspective. From bank's perspective more the number of projects it finances the more the diversification possibility and thus lesser the risks.

But this has higher risks for bank manager who has to stick out her neck for each of these projects. From bank manager's perspective fewer the projects and more the number of borrowers approving the project as credit-worthy lesser the risk for bank managers. But this means more the risk for the bank (concentration risks).

In sum

The cumulative effect of all these is that at low interest rate the credit is denied to small borrowers at the expense of irrational mega-projects of large businesses. When the interest rates rise, as they always do, these projects turn bad and become a drag on the economy.

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About Australian banks and Australian property

noreply@blogger.com (Rahul Deodhar) — Fri, 08 Feb 2019 02:42:00 +0000

John Hempton highlights something interesting today about resignation of top Australian Bankers.

Back in 2016 John Hempton and Jonathan Tepper of Variant Perception conducted research by personally meeting with the real estate brokers and seeking apartments to buy. In a sort of reply of scenes from the Big Short, they found banks wanting on the paperwork, mortgages being sold to those with questionable ability to repay. You can read some media reports about this here, here or here.

Today John Hempton wrote about recent firing in light of the final report of the Royal commission into banking and detailed allegation therein. John Hempton says:

Anyway come the Royal Commission Dr Henry talked to the Commission in a frank and open way about the problems. It was Dr Henry being Dr Henry: honest, competent, and realistic.

It came off badly. I remember the grilling he got from the Royal Commission and understood what was happening. It was clear that what was required from the Royal Commission was kowtow, rather than honest frank discussion. Dr Henry looked bad even though he was probably the single most reliable and honest witness the banks put up.

The Royal Commissioner made specific findings against Dr Henry and Andrew Thornburn. This surprised me because on my research National Australia Bank was the best of a bad lot, both in absolute level of moral decay and in direction.

The report quotes Dr. Henry and Thorburn in many places. The transcripts do not show Dr. Henry in good light. The transcript indicates that possibly Dr. Henry took this too lightly. He did not do any homework. A deposition once you are sworn in is a serious business. I do not sympathize with Dr. Henry.

The transcript of some others reveal that they kept repeating from jargon books and PR manuals. To that extent whatever their deep rooted ills did not come out.

Implication for property market

There are two fundamental issues with the housing and mortgage markets.

First the search for yields and the quantum of capital available makes real estate the best asset class to absorb the QE effects. It is doing precisely that. So some of the price appreciation is attributable to this. The macro policies have created this asset builders boom - create an asset and sell it to REIT type holders at ludicrous cap rates without any regard to final consumer.

Second, the problems in mortgages are of banks creation. As banks search for return in a tight market they have crossed the limits. The crisis in Australian banks is part of continuum that includes Wells Fargo opening accounts for customers to US sub-prime crisis. It may not be as acute but it is part of the same class.

Learnings for Commissions in India

The commission for banking has its website and documentation spot on. I urge Indian commissions to maintain such kind of records open for public scrutiny.

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Questionable Promoters' action

noreply@blogger.com (Rahul Deodhar) — Thu, 07 Feb 2019 07:53:00 +0000

Deepak Shenoy from CapitalMind has an excellent blog and website. His post today titled Jubilant Backtracks From Paying Promoters For Brand They Don’t Really Use deals with some questionable actions by the Bhartias. Below are edited quotes from that article.

Jubilant Foodworks and Jubilant Life Sciences in a board meeting, they proposed a 0.25% royalty on consolidated sales for using the “Jubilant” name , to each of the companies.

To give you a perspective Jubilant Foodworks is franchisee operator for Dominos and Dunkin Donuts both well known US brands. Jubilant Life Sciences is a pharma company in generics and contract manufacturing.

The article further details various business groups doing this activity in some form or other. The two prominent ones that are missed in that discussion are the Aditya Birla Group and Kingfisher. Here are some from the article:

Royalty from listed companies -

Colgate from Colgate India (4.8% of turnover)
Unilever from HUL (3.15%),
Dominoes from Jubilant Foodworks (~3%),
JSW Steel to Wife of Promoter (INR 1.25 billion)
Tata from Tata companies using Tata name (0.25%)
Tata from Tata companies not using Tata names (0.15%)
Muthoot group
Shriram group
Wadias (intending) from Britannia Industries

Loans to promoters later written off

Network 18
DHFL (Alleged)

Merging promoter companies with listed ones at unclear valuations

Satyam
JPAssociates
LEEL
Eon electric (attempted)
Vedanta

Financing Promoter lifestyle

Raymond - maintaining Raymond House

I do not like these kinds of "promoter earnings". You are either a promoter or an employee - don't be both. These should come within the purview of related party transactions irrespective of their materiality.

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Urban Development problem in India - the lack of proper Development Plan

noreply@blogger.com (Rahul Deodhar) — Thu, 24 Jan 2019 04:28:00 +0000

Recently, I had the opportunity to examine the Draft Development Plan released by Maharashtra State Road Development Corporation (MSRDC). The plan is quite badly designed. Yet, what hurt me more was the fact that this plan was developed for Special Planning Area (SPA) which is not developed as much so the development is almost green-field urbanization. And yet, even when we are given a clean slate we make such primary mistakes in planning. I wrote about the shortcomings in an Article in Moneylife.in titled "How can smart cities be built on dumb development plans?"

I have looked at the population, water demand estimation, power demand estimation, waste estimation, transportation planning etc. On every parameter this plan falls short. Have a read and leave comments.

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Oil trade routes and India's geo-political advantage

noreply@blogger.com (Rahul Deodhar) — Thu, 13 Sep 2018 07:26:00 +0000

Here is a picture about oil trade routesfrom Geopolitical futures:

You can see the Geo-political importance of India. India has access choke-points carrying about 40 million barrels per day - 4X flow at all other choke points put together. Guarded by a decent navy that can go against the best.

You will realise why China is interested in this area and interested in encircling India with string of pearls. More so if you have read Daniel Yergins The Prize. (If not read it now for understanding of oil industry).

For more details of balance of naval presence in the Indo-Pacific region look at the map below:

Naval Bases in Indo-Pacific - Rahul Deodhar (data from public sources)

These maps are important tools to understand Geo-politics and George Friedman of Geopolitical Futures has a great compilation. Head over there to check it out.

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Can only US markets go higher in the face of tariffs and other trade headwinds?

noreply@blogger.com (Rahul Deodhar) — Wed, 12 Sep 2018 05:31:00 +0000

In one word - NO!

One the trade front, the US needs other countries (suppliers) as much as other countries need US as a consumer No. 1. Yet, the consumption burden falls excessively on the US. That too is not sustainable. In the natural course of things this burden should gradually pare down. This natural process was impeded by interventions in currency and trade policy by (a) East Asian economies following 1997 crises and (b) Japan first then China.

In the first case, the impact is benign as the comparative sizes of the economies in South East Asia and US/UK etc is too big.

The second case turned out to be problematic, though bit less, in case of Japan. Absent the computer and technology revolution, US would be in same position as today as in post-Japanese growth phase. At the time when the US jobs were diminishing in the face of Japanese competition and trade, Tech was already cooking in the oven. The massive productivity boom unleashed by tech was supported by job growth in new sectors. These sectors pulled decent quantum of current workforce and modified the training profile of upcoming workforce.

Today, there seems to be no new sector that is vigorously attracting the current workforce into itself. There are two reasons for this. First, the speed of Chinese growth is dramatically higher than Japanese growth. What Japan achieved between 1945-1980, China achieved between 1980-2000. Second, Japan started at the time of man-power constraint. China started gaining traction when manpower was becoming surplus. Therefore, job "protection" in developed world has become important.

The trade fears can be allayed / calmed if there is another sector that can create as many jobs for the profile of workforce that exists today and about 20 years from now. Absent that, growth will require fighting for a larger share in a diminishing pie - a potent trigger for conflict. The war can be won by biggest bully if he is alone. But when there are a few contenders it takes time to settle the pecking order. Many skirmishes (I mean trade & currency conflicts) need to happen to settle that order. For strategy suggestions we can look at how pecking order is established in prisons. The strategies will be same the tools will be sophisticated.

Thus, US cannot do trade wars alone. US needs its own "gang". That gang was NATO, NAFTA and these days the "Quad". The Stock markets of one gang may rise if the gangs are tighter) and they may decouple from other gang. But only US markets rallying is not possible.

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