Sunday, September 30, 2012

Prime Minister's confession

Sometimes the Prime Minister speaks the truth. Yesterday (29th Sept.) was one such occasion.

According to a report in The Hindu, Manmohan Singh had an informal interaction with journalists soon after the swearing-in of the new Chief Justice of India. (Formal interactions are well-rehearsed and are therefore truth-proof.)

On UPA allies' apprehensions that the government's recent decisions could hurt their electoral prospects, the Prime Minister remarked,"We will do what is good for the country. We are far away from elections." The giveaway is that when the elections are nearing, do not expect the government to do what is good for the country.

Cliff effect of a possible downgrade of India's credit

In the month of June, 2012 global rating agency Standard and Poor's (S&P) threatened to downgrade India's sovereign credit rating to ‘speculative' from the lowest notch of ‘investment' grade. The report containing the threat was sensationally titled ‘Will India be the first BRIC fallen angel ?' Predictably, this warning was a red rag to bullish ministers in Indian government and they characterised the report as whimsical, tendentious and mischievous. It was argued that Indian economy was the second fastest growing among large countries (next only to China) and that India was capable of springing pleasant surprises.

Earlier in April, 2012, Standard & Poor's scaled down India's credit rating outlook from ‘stable' to ‘negative' with a warning of a downgrade if there is no improvement in the fiscal situation and political climate.

This chronology of events shows that deterioration in the state of Indian economy as reflected in economic data released during the April – June quarter was quite palpable. If India’s rating is downgraded (from the present BBB-) to BB+ or any rating below (also known as ‘junk’ rating), the economic consequences will be horrendous.

Many otherwise knowledgeable people criticize rating agencies for rating countries like Spain and Italy which are reeling under severe economic pain, higher than India. The reason for this apparent paradox is the disparity in their per-capita incomes. Whereas Spain and Italy have per-capita annual incomes of $ 31,550 and $ 31,090 respectively, India’s is only $ 3,560 according to World Bank’s assessment for the year 2010 under ‘Purchasing Power Parity’ principle. India is ranked 153 out of 215 nations. It is logical to assume that an economy with higher per-capita income can withstand economic shocks better. Spain is rated BBB+ and so is Italy.

If we look at the methodology adopted by S & P to award sovereign ratings, we will realize how shockingly imminent our downgrade is. S & P factors in political, economic, external, fiscal and monetary profiles of the country. Crucial determinants for political score are dynamics of policymaking and transparency of institutions. Who can deny that these are our Achilles’ heel now? It is interesting to note that when S & P downgraded USA from AAA to AA+ in August, 2011, it presented the following reason:

“the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

Economic score is determined, inter alia, by assessing income levels, growth prospects and volatility. India’s performance is poor on income levels; volatility is unfavourably high on account of continued dependence on monsoon and uncertain availability of infrastructural facilities like power.

Status of currency and external indebtedness are taken into consideration for external score whereas sustainability of fiscal deficit determines fiscal score. India’s fiscal position continues to deteriorate on account of government’s inability to optimize management of subsidies owing to political compulsions. Monetary score varies with credible monetary measures to tackle inflation. So whichever way you look, the chances for a downgrade in our rating are uncomfortably high.

Why Cliff Effect? : In economics, if the effect of an action is disproportionately high either positively or negatively, the effect is christened as “cliff effect”. If India is downgraded from BBB- to BB+, the consequential adverse impact will be immense. Though downgrade by a notch is normally not a significant development, fall from investment grade to speculative grade is considered as calamitously precipitous (and hence the cliff effect).

Many international investors detest funding speculative investments. Even those who are ready to lend will charge higher rates of interest. Generally, corporates will not get a better rating than the country’s sovereign rating. Therefore, even major Indian banks will face higher interest burden for funds sourced abroad. For instance, as on 31st March, 2012, SBI had deposits worth Rs.61,433 crore in its foreign branches and borrowings outside India equivalent to Rs.78,127 crore. SBI had also raised capital funds abroad in the form of innovative perpetual debt instruments equivalent to Rs.3,179 crore. Interest rates on these funds raised abroad will go up if India’s rating is junked. ICICI Bank’s deposits in foreign branches on 31st March, 2012 was equivalent to Rs.13,128 crore and borrowings outside India Rs.84,509 crore. Indian banks and other corporate will face two consequences: 1)Raising funds abroad will become more difficult and 2)whatever funds are available will attract higher interest costs.

Sharp differences in credit qualities of investment-grade and speculative-grade sovereigns are brought out by the following observation of S & P: “An average of 1% of investment-grade sovereigns have defaulted on their foreign-currency debt within 15 years, compared with 30% of those in the speculative-grade category. All sovereigns that have defaulted since 1975 had speculative-grade ratings at least one year before default.” These facts are chilling and one hopes that Government of India will do all it can to stave off a ratings downgrade instead of shooting the messenger (rating agency) when it is too late.

Thursday, September 27, 2012

Supreme Court's apt observation

A 5-member Bench of the Supreme Court has held that auction is not the only legitimate method for allotment of natural resources. Whatever be the method, if public interest is served, it is constitutional. A report in The Hindu says,

"Justice Khehar, who wrote a separate but concurring judgement, said that natural resource should not be dissipated as a matter of charity, donation or endowment, for private exploitation.

“No part of the natural resource can be dissipated as a matter of largess, charity, donation or endowment, for private exploitation. Each bit of natural resource expended must bring back a reciprocal consideration. The consideration may be in the nature of earning revenue or may be to best subserve the common good. It may well be the amalgam of the two.

“There cannot be a dissipation of material resources free of cost or at a consideration lower than their actual worth. One set of citizens cannot prosper at the cost of another set of citizens, for that would not be fair or reasonable,” Justice Khehar said. "

Justice Khehar's observation is laudable. Had it become a  part of a binding judgment, it would have been more welcome.

Since this judgment is a response to a Presidential Reference, the judgment is not binding. However, the government is expected to keep the court's views in mind while allocating any natural resource.

Wednesday, September 26, 2012

Corrupt 'Power'

A public interest litigation has been filed in the Allahabad High Court questioning the legality of uneven distribution of power in the state. The VIP constituencies namely those represented by Sonia Gandhi, Rahul Gandhi, Akhilesh Yadav, his wife, Mulayam Singh Yadav and Azam Khan enjoy 24-hour power supply whereas the other areas in U.P. suffer power disruption for many hours every day.

Such blatant misuse of power is obviously arbitrary, discriminatory and falls foul of law. It is hoped that the Court will put its foot down on such corrupt practices. Why is it that our leaders do not find it repugnant to violate all canons of decency and democracy?

Monday, September 24, 2012

Turncoats, all

In an interview published in Business Standard on 24th Sept., Montek Singh Ahluwalia is asked the following question:

"In December 2002, when the BJP was considering FDI in retail, Manmohan Singh, then the leader of the Opposition in the Rajya Sabha, told the Federation of Business Associations of Maharashtra, 'India does not require these kinds of reforms; they would destroy employment.' What has happened in the last ten years to make him reverse his position?"

So much for the consistency of the economist-prime minister. Yes, all politicians are opportunistic chameleons; but we expect more decorous behaviour from an 'intellectual' prime minister.

You may wonder what Manmohan Singh had said in the Rajya Sabha in 2002. He never opens his mouth where and when he is expected to. Period.

Singh practises decennial turnabouts. Pro-reforms in 1991, anti-reforms in 2002 and pro-reforms in 2012.

There are arguments for and against FDI in multi-brand retail. But when politicians and particularly the prime minister use expedient arguments only to fool the public, they deserve to be booted out. In this context, Santosh Kumar Suman's act at Vigyan Bhawan was exemplary. Ofcourse, Manmohan Singh will continue his trickery unruffled. Will a robot ever get ruffled?

Saturday, September 22, 2012

Rahul Gandhi

Many of us do not know the greatness of Rahul Gandhi. We must be thankful to people like Shaktisinh Gohil, Leader of the opposition in Gujarat Assembly who remove our ignorance. He has recently proclaimed, "Rahul Gandhi is a very fine gentleman and highly educated". We may infer that Rahulji is as fine a gentleman as he is educated.

Rahul Gandhi is capable of achieving what Mahatma Gandhi desired but could not do. The Mahatma wanted the Congress party to be dissolved. Rahul Gandhi will go one step further and 'destroy' the party.

Eighth Wonder: Manmohan Singh addresses the nation

The prime minister took the nation by surprise by addressing it on Doordarshan. Earlier he had said that his silence was meant to protect dignity of the questions (whatever it had meant). So dignity of the questions was ripped apart in a brief 15-minute talk.

"I would be failing in my duty if I do not carry the reforms forward like was done in the year 1991." It is great that he has realised his duty. If only he had realised it earlier, scams might not have devastated the country.

"The world is not kind to those who do not tackle their own problems." That is why he allowed his ministers to feather their own nests.

"Much of the diesel is used by big cars and SUVs owned by the rich and by factories and businesses. Should government run large fiscal deficits to subsidise them?" Very interesting 'eureka' moment! Why did it take so long for the illustrious economist to realise this?

"The decision on LPG was based on a study that almost half of our people , who need our help the most, actually use only 6 cylinders or less." Which study? The so-called finding is very cleverly worded. More than 40% of our people do not use LPG.  This 40% is included in "almost half of our people".

"Taxes on petrol were reduced for the crores of middle class people who drive (sic) scooters and motor cycles." But the net prices are retained. If the concern is real, tax-reduction would have been higher.

"In a growing economy, there is enough space for the big and small to grow. The fear that FDI in multi-brand retail would hit small traders is unwarranted." Nice to hear. Is retail a win-win game where every small trader can grow his business even if a big fish enters the fray? Walmart's retail sales in America is in excess of $1 billion every day. Such a big player may enter India and yet the economist-prime minister thinks this development will not affect small traders? We cannot have a more optimistic CEO for the nation.

The prime minister is confident that FDI in multi-brand retail will reduce prices for consumers and increase realisation for the farmers' produce. He stopped short of saying how much different ministers will gain.

Thursday, September 20, 2012

Would the President apologise?

The British deputy prime minister, Nick Clegg has apologised to the British public because he could not keep up his electoral promise not to hike tuition fees. He has also undertaken not to make any promise in future which he cannot keep up.

Our present President, Pranab Mukherjee when he was the Finance Minister assured the parliament that the government would not go in for FDI in multi-brand retail before evolving a consensus among all political parties. This promise stands broken.

The president has only two decent options: 1)He may advise the Union Government to abide by the promise or 2)He may tender an apology to the parliament for his inability to deliver on his own commitment.

Is it prudery to expect decency?

Tuesday, September 18, 2012

Argentina copies India

Montek Singh Ahluwalia forgot to copyright his intellectual thesis on poverty lines. His discovery that per-capita per-diem expenditure of Rs.28 in urban areas and Rs.22.50 in rural areas uplifts an Indian from poverty is too phenomenal to be forgotten ever.

Argentina has now stolen his magnum-opus and has stealthily declared that a six-peso food bill per day is all that is necessary to enable an Argentine to escape poverty. According to Economist, six Argentine pesos can fetch only one sweet biscuit.

We urge M.S.Ahluwalia to copyright his concept before other economies rush to banish poverty without acknowledging his contribution.

Perils of nascent democracy

Transition from dictatorship to democracy is a painful process. It is also very costly in terms of sacrifice of precious lives. Events in Iraq, Egypt and Libya are too recent to forget.

The present international crisis over a film produced by a madcap brings centrestage the travails of any fledgling  democracy. The TIME magazine argues:

"Before the Arab Spring, this chain of events would likely have been stopped early. Dictators like Egypt's Hosni Mubarak and Libya's Gaddafi either blocked internet access to prevent their people from seeing inflammatory material (among other things) or used their security agencies to crack down on protests long before they could reach critical mass. ----------- The tendency of democratically elected governments has been to look the other way and hope the demonstrators run out of steam. It doesn't always work."

Well said. However, it is neither desirable nor practical to get back to despotism. But we need to be constantly aware that a true democracy asymmetrically pits  law-constrained government against lawless thugs. Democracy demands patience and stoicism to bear unpredictable strains.

What if?

I wonder what would happen if the following not-so-improbable events took place:

1)Manmohan Singh is sacked from the Congress party for greeting Narendra Modi on his birth-day.

2)Montek Singh Ahluwalia is awarded Bharat Ratna for abolishing poverty from India by fixing a poverty threshold expenditure limit of Rs.0.00 per annum.

3)The Vice President Hamid Ansari receives a fatwa for not setting the Rajya Sabha on fire in protest against "Innocence of Muslims".

4)The minister Jairam Ramesh is shown the door for failing to originate any scam.

Wednesday, September 12, 2012

Mass copying at Harvard

It is reported that more than 100 students in Political Science course in Harvard University had resorted to mass copying and other unfair means in a subject called "Introduction to Congress". The university is considering punitive steps against them.

What would have been the reaction if a similar event had taken place in India in a subject called "Introduction to Parliament"? The university would have applauded them for learning so quickly how to adopt unfair means which would stand them in good stead as and when they become parliamentarians. Students adopting unfair means and worse would immediately have got certificates of merit. Budding parliamentarians!

Sunday, September 09, 2012

White Revolution

The Father of milk revolution in India, Dr.Verghese Kurien is no more. He was a passionate and tireless genius who overcame many bureaucratic hurdles to place Anand in the world milk map.

His cousin, Ravi J.Mathai was another entrepreneurial genius. He stood down from Directorship of IIM, Ahmedabad when he felt he could not contribute any more as a Director. While he functioned as a Director, his contribution to IIMA was enormous. Ravi Mathai also promoted Institute of Rural Management at Anand at the instance of Verghese Kurien.

Thursday, September 06, 2012

Kapil Sibal at his comical best

The incorrigible  comedian-minister, Kapil Sibal is now entertaining the country with what is arguably the zaniest statement ever made. After confounding the nation for months with the claim that there is no policy paralysis, he has now stated that private sector is responsible for policy paralysis. At the curtain raiser for India Telecom 2012 Conference, he has advised the private sector telecom operators "to rise above self-interest". All these days, economists have been misleading us into thinking that self-interest is the motivating factor for private sector. And we used to opine, wrongly as we now gather from the honourable minister, that ministers should rise above self-interest.

KS has lamented,"Each telecom operator when he comes to me , his focus is his business, his future." May we ask the humorous minister, what was his focus when he was practising law? Was it his business (profession), his future or country's future? If he deigns to answer, we will be treated to a season of unending laughter.

The minister further clarifies, "If self-interest continues to be the driving force for private sector players, their interests will be hurt ultimately." He has at one stroke turned Economics upside down.

He has also enlightened the physicists on Newton's Law of Motion. "If your self-interest is your driving force, then Newton's Law of Motion will apply. Every action has an equal and opposite reaction. What will happen is your self-interest will be ultimately hurt."

We are unable to visualise funnier statements. But let us not underestimate Kapil Sibal. He is capable of providing more entertainment.

Sunday, September 02, 2012

Conflicting views on "Conflict of interests"

Ministers in India may be corrupt, dishonest or arrogant. But you cannot accuse them of being short on innovative ideas.

Recently Mr.Subodh Kant Sahai, Union Minister of Tourism has come under "unjustified" fire on a charge of conflict of interest. He wrote a letter to the Prime Minister on 5th Feb. 2008 seeking his personal intervention for allocation of two coal blocks to SKS Ispat and Power Ltd. On 6th February, the ever-so-prompt Prime Minister wrote to Coal Secretary recommending appropriate action. Needless to say, the needful was done. Subodh Kant Sahai's brother, Mr.Sudhir Kumar Sahai is a Director in the company. If you are accustomed to contemporary ministerial standards of probity, you would ask "so what?" If you are an innocent layman or should I say, an ignorant nincompoop espousing an obsolete sense of ethics and fairplay, you would be aghast at the outrageous conflict of interest in the act of of a minister, supposedly a trustee of nation's wealth, recommending conferment of a bonanza to his brother at the cost of public exchequer.

The honourable minister ofcourse justified his action since he has done it "for the development of the State". In order to clear any doubts, he went on to assert "in future also, I would make such recommendations for the development of my State". The minister sees no conflict of interest in this 'patriotic' act.

Would the minister have recommended if his family members were not involved? The minister does not tolerate such stupidity of thought. He is categorical in emphasising "I would not recommend any person on the street (mathlab: a non-family member). We recommend somebody only after checking his antecedents (meaning: how he is related to me)".

I must confess I could not understand the theory of absence of 'conflict of interest' when a minister takes advantage of our Prime Minister's munificence to enrich his relatives. When the interests (duty to uphold public good and downright nepotism) conflict, how can we say there is no 'conflict of interest'? My doubts vanished the moment I grasped the significance of the Chidambaram Doctrine which clarifies that there is an ocean of difference between "no loss" and "zero loss". When interests conflict, it is not "conflict of interest". QED.