KYC Kaos by SBI

Wanting to rant about KYC Kaos (=chaos) is the reason I am returning to my blog.

Here is the text of my tweet to SBI and UIDAI

“I support #Aadhar Dear @ceo_uidai but @TheOfficialSBI is harrassing me by asking paper copies for KYC despite my bank ac and PAN being linked with Aadhaar. SBI even put a lien on my account with arb amount w/o formal notice. @FinMinIndia @PMOIndia . Two physical visits needed get lien lifted.”

SBI SM handle ‘replied’ with just an acknowledgement. Nothing from UIDAI.

I posted the above tweet on my Facebook page. I got inputs from knowledgeable people in banking explaining how KYC updating regularly is necessary as per ‘risk weightage’ and banking regulations and that the banks warn their customers before any action etc. I was also informed about how our banking practices are one of the most evolved in the world and a visit to branch every 2-3 years should not be a problem.

Since I am dealing with SBI, RBI, and UIDAI like world class institutions, I’d better be right and my peeve should not be just a crib. So I thought I will take the trouble of writing down what happened.


1. On March 17, 2018 at 19:06 I received a text message informing me that a hold of Rs xx ( amount significantly large) has been created in my savings account.

2. I didn’t receive a single text message or email from SBI about any pending action from my side KYC related or otherwise prior to the above sms. I have searched sms s and emails (including spam folder) to reconfirm this. I received many emails about not sharing OTP, exhorting me to download YONO app and all that. So my email and mobile no. with SBI have been correct.

3. I had linked my SBI account with AADHAR sometime back and I had submitted KYC documents to bank some time back so I didn’t even imagine this could be a KYC issue. I don’t have any loans. Nor I have given any standing payment instructions out of my savings account.  And I have some good FD s with the same SBI branch – my home branch.

4. Perplexed, I called SBI 24×7 customer care number. Remember it was Saturday and it was 7 PM. After wading through IVR I managed to get the ear of ever so helpful and ever so sweet customer support executive only to be told that ‘Sorry Sir, this can be due to some loan or standing payment instruction related issue. I need to contact home branch.

5. Through my Sunday runs and beers and nap I kept wondering about this ‘lien’ on my account. I hate the word. SBI, the largest bank in India was telling me that I had ‘defaulted’ on something and that they had to take this drastic step against me on Saturday evening itself  -so that I don’t flee and fly away like Mallya or Nirav.

6. On Monday morning (19th March) I tried calling my home branch because I wanted to know what exactly was the problem before visiting. No luck. Numbers saved on phone didn’t exist anymore. Google search and SBI web site branch page also retuned nonworking contact phone numbers.

7. My wife agreed to pay a visit. She was told that it was KYC ! You need to come with AADHAR Card and PAN Card original and self-attested photocopies.

8. My wife made another trip next day ( it is better that the same person meets the same person on the same issue, even if our systems are so evolved) and did the needful . Lien gone.

Now my questions

1. KYC is a must.  Have it renewed regularly. But please can you be a bit predictable? How about a KYC calendar like Tax return calendar?

2. If Jan Dhan accounts with zero balance can be opened just with AADHAR, why is anything other than AADHAR linking is needed for Savings accounts with no loan and with some good FDs ? Don’t say that RBI says so. Logic? Risk weightage? Come on.

3.  UIDAI says AADHAR is not a card. It is a number identifying a person using biometric data. How the hell SBI is asking for photocopies of AADHAR ? And SBI is not alone in this .

4. Why can’t SBI install kyc terminals in its branches? It has been for years that AADHAR and Jan Dhan have been existing. (Oh the pleasure of getting a Jio SIM by just showing your thumb to its eKYC terminal! )

5. I keep getting emails from Mutual Fund registrars  that I should link my AADHAAR with my account or else … . This even after I have done it. So they add ‘ignore’ it if done already to play safe.  You can’t filter out those who have done and remind only those who haven’t?

But our great SBI didn’t even send me a single email or sms. On a Saturday evening it woke up with a start to my ‘risk weightage’ and sprung into action to bring a lien down on me!

I also wonder: Mallya and Nirav must have complied fully with KYC. And that must the reason they could avoid any high risk weightage for years and years.





Indians are getting the big picture about DeMonetisation that the ‘Intellectuals’ are missing

Millions of ordinary Indians are enthusiastically supporting demonetization because they understand it.

Ordinary Indians know that in demonetization and what follows it, they have a once in a life time opportunity to leave a better India for their children.

Well below the radars of the media and the political parties, India has been changing silently. The change gathered pace under the technology savvy leadership of the indefatigable PM Modi.

Some time back, I wrote about India’s technology powered silent revolution-

“A silent revolution is going on in India’s noisy democracy. So silent that it easy to miss it amid our politics of protests. India’s capacity to transform itself is getting better.

India is leapfrogging ahead of advanced economies through pervasive use of technology in governance and public services. Indians are switching from being beggars of State to being participative and being demanding citizens.”

(Read )

Press headlines, TV news tickers, pundits and economists and political parties miss the above technology enabled revolution of Digital India.

But what they are now missing is much bigger.

There have been straws in the wind.  PM Modi’s campaign made over a crore people give up LPG subsidy. This was unprecedented. Compare this gesture of goodwill by a large and vocal section of population with that of all pervasive cynicism of decades of Sonia and Congress raj.

Modi-led BJP and NDA swept the polls due to anger towards Congress misrule and due to his promise of development. Many thought, the pundits were sure, and the opposition hoped that BJP and NDA’s victory was just a wave or a tide and that it would subside or turn soon. The Delhi and Bihar elections seemed to confirm this.

Then the surgical strikes against Pakistan happened.  It won every Indian’s approval. As opposition was trying to pick non-existent holes and question whether surgical strikes really happened or not using Pakistani sources, PM Modi announced the big bang demonetization.

Economists may give out sophisticated predictions about this that and the GDP,  but even the illiterate person knows that ‘notes’ are necessary for all the above crimes because he had been made to hand them under the table or he had to do with less ‘notes; because the middleman would keep the rest. They know implicitly that if notes are crucial to run their lives, they are even more crucial to turn the wheels of crime silently and secretly. Women, who by habit squirrel away tiny bundles of notes to tide over emergencies, get this even better. They know that they have nothing to hide but the criminals need the secrecy of notes.

But they had become accustomed to see politicians protecting those of their ilk. No one had imagined that a Modi would come and break the back of the corrupt and make the criminals run for cover.

They now know that the PM is on their side and that he is taking on the entire establishment. He truly is their PM.

The demonetization brought them a once in a life time opportunity to do something for their country as a part of their day to day work. Their PM is asking them to suffer the queues (which they are used to), to help each other (which they do often), to learn about cards and wallets and go cashless (didn’t they learn cellphones and WhatsApp?). For their efforts they would get a cleaner and more peaceful society. And they all rose to accept the challenge.

When PM Modi recently asked us to participate in maha yagya to defeat black money, corruption, crime, and terror he spoke a language alien to economists and those who have not gone beyond the western education. He spoke a language not known to the corrupt and criminals. But he spoke the language that Hindus and Muslims and Christians and everyone of India can understand. He spoke the language which even the illiterate connect with.

Yagya means worship and devotion through offerings (aahuti) to the sacred fire.

When one looks at the near universal support for demonetization among common people, when one can identify with their sense of purpose in willingly endure the inconveniences and unfortunate suffering in some cases, it is clear that the fight against corruption, crime, black money, and Jehadi terror has become a maha yagya. In PM Modi’s words:

मुझेविश्वासहैभाईयों, जिसदेशमेंसवासौकरोड़देशवासियोंकेआशीर्वादहोंवहांपरकालाधनकाखात्मासंभवहै, भ्रष्टाचारकाखात्मासंभवहै, भाईयोंबहनोंदेशअच्छीदिशामेंजानेकेलिएतैयारबैठाहैऔरमुझेविश्वासहैयेदेशइसमहायज्ञमें, ईमानदारीकेमहायज्ञमें, देशवासियोंकोकष्टझेलकरकेभीआहूतिदेतेमैंदेखरह

People now wait expectantly for Modiji’s every move against the ills that plague their country. They are willing to participate and do their bit for the country. They know this is their once in a life time opportunity to leave behind a better future for their children.

Indians are getting the big picture that the big are missing.


This article was first published  at:

Lawrence Summers’sweeping allegations and ill willed prophecy about India’s demonetization -A rebuttal

The article Most sweeping change in currency policy in the world in decades  coauthored by Natasha Sarin and Lawrence Summers makes sweeping statements of India’s demonetization unhindered by facts.

While PM Modi’s Big Bang demonetization has gone down well with a large majority of ordinary Indians despite inconveniences and difficulties, the global media’s coverage has been heavily biased.  This is not surprising given the vested interests that control media empires.

But one expects economists to give well reasoned assessments.

Lawrence Summers is no ordinary economist. Among other things, Summers was the Chief Economist of the World Bank, Undersecretary for International Affairs of US Department of Treasury under Clinton Administration, and Director of National Economic Council a forum used by US President. He is the one who had recommended abolition of US $100 and Euro 500 notes.   “One of us (Larry) has long advocated the abolition of the $100 note in the US context and the 500 euro note (aka the Bin Laden) in the European context

Since Summers is undoubtedly the far more accomplished of the two coauthors and since article is published on his website, we can assume that he fully stands by the article.


Bye bye, facts

The economist duo ‘recognizes’ that ‘many who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways’.  Do those who hold cash in large quantities in the US or Europe have come to be wealthy in legal ways? But that’s another subject.  The duo criticizes that what was legal tender was suddenly no longer legal. It doesn’t see that secrecy and suddenness of demonetization is a must to ferret out black money in cash form. In India, even critics (most of them) of demonetization agree that the suddenness and secrecy are critical success factors and they focus on execution issues.

Nor does the duo take into account the fact that India has been facing terror attacks from Pakistan which are funded by fake Indian currency -almost all of it in denominations of Rs 500 and Rs 1000.

The duo questions ‘equity and efficacy’ of India’s demonetization.

As far as efficacy is concerned, we have already seen that Pakistan paid stone pelting in Kashmir has stopped. Concerning black money in other forms, PM Modi has already announced that demonetization is just the beginning and that more actions like crackdown on benami holdings will come soon.

Equally importantly, India has near universal banking and it is rapidly digitizing. A nation-wide GST is another way of bringing large number transactions out of the black economy. The united payment interface (UPI) that makes person to person e-payments possible has been launched. The duo fails to factor in all these fundamental changes.

The economist duo also doesn’t recognize that even if majority of illegal wealth is in non-cash form, cash (means Rs 500 and Rs 1000 notes in India) is vital for the black economy to function.

We shall deal with ‘equity’ in a while.

Summers and his coauthor make sweeping and baseless allegation against Modi government

The duo says about Modi Government ‘ the temptation to expropriate is understandable’.  In effect, Summers and his colleague are accusing the government of giving in to the temptation of taking over someone’s property. This is a serious accusation and is completely baseless because any Indian citizen can deposit his old and useless notes in his or her bank account and get them credited without any limit. It remains citizen’s property. If questioned by Income Tax or other tax officers, citizens have to show that the amount is consistent with declared earnings and economic activity. Is the economist duo suggesting that things ought to work differently? Do the Income Tax people in US or Europe behave differently? So, how is this expropriation?  Summers and his colleague are wildly off the mark here.

Making legal ambiguity as a defense of the corrupt

The duo says ‘ Most free societies would rather let several criminals go free than convict an innocent man’  and the goes on to  ‘ Moreover, the definition of what is illegal or corrupt is open to debate given commercial practices that have prevailed in India for a long time’. Now innocents aren’t getting convicted nor is there any ambiguity in India about what is illegal and corrupt. Perhaps these ‘defenses’ have worked well for bosses of western financial institutions who were caught in various frauds and yet had no personal culpability despite tax payers bailing out their institutions.

The economist duo may note that the Indian legal system was available even for Kasab, a Pakistani terrorist captured in terror attack of 26/11 to defend himself for years.

Now, about the ‘equity’

The Big Bang demonetization announced by PM Narendra Modi caught many in a bind. The black money hoarders got a black eye. Parties like Congress, AAP, TMC, SP, BSP, RJD and yes, your neighborly Sena cousins got hit badly. Builders and Jewelers conducting illegal cash businesses got hit on head and saw stars. The stone pelters of Kashmir ended up jobless. The Naxalites got busy in scraping the bottom. The big bang detonated under seats power in Pakistan too.

Ordinary people complain about queues and inconvenience but they think it is a small price to pay to get rid of black money, mis-governance, and terror. Some cash dependent (black money) sectors like realty and jewelry have taken a hit. There may be a temporary slowdown. To more than balance the negative effect, if any, banks have received so much cash that they have started dropping lending rates. State Bank, India’s biggest lender is one of them. The fall in interest rates has taken place even though RBI hasn’t cut benchmark rates. Legitimate businesses will get boost.  We aren’t even talking about the illegal cash that doesn’t come out in open is now trash and its power to vitiate economic and social fiber is now Zero.    82% Indians favored the decision and 84% said Modi government was serious about the issue‘   It is a people’s movement. That’s equity.

Ill-willed prophecy?

The duo then offers a prophecy -‘ the ongoing chaos in India and the resulting loss of trust in government fortify us in this judgment’ -as a justification for its ‘judgment’!

There are baseless allegations against Modi government, legal ambiguity as defense of the corrupt, and an uncalled for (ill willed?) prophecy in Summers’ and his coauthor’s article.


Neither economics, nor logic

The quality of Summers’ and his coauthor’s  article reminds one of Arvind Kejriwal’s allegation The government expects to net 10-11 lakh crore rupees by asking people to surrender the spiked currency and write off the bad debts’ (read )  You can’t write off bank loans (assets) by using peoples’ deposits (liabilities) .

Do you find economics or logic anywhere?

Also read:

This article was first published here:

PM Modi converts war on black money into people’s movement

(Image source

On the night of Tuesday November 8, 2016 as the world was tuning into the early trends of the US Presidential elections, PM Modi opened a new front in his war against black money. Not just that, he has done the unthinkable. He has managed to convert a government’s war into a people’s movement.

Modi has been saying again and again that his government will do everything that is necessary to remove the curse that is black money and to help every Indian in coming out of poverty and improving their life. Whether it was during his 2014 election campaign or later, he vowed to bring black money into main stream economy and make its perpetrators pay for their crimes. Whether while forming SC mandated SIT or during Income Declaration Scheme 2016, he repeated his intent. But, Indians in general and his opposition in particular didn’t pay much attention to what their Prime Minister was saying.

Everyone has been jolted out of his or her ‘business as usual’ or ‘things won’t change much’ state. Mamata Banerjee, Arvind Kejriwal, Mulayam Singh Yadav, Mayawati, and Lalu Prasad Yadav are clearly unhappy and are now contemplating ‘unity to counter the demonetization’. A large number of Indians are inconvenienced -such a major surgery on political economy would inflict some unavoidable pain – but almost every Indian is united in their conviction that PM Modi will deliver on his promises.

Overnight, Government’s war on black money became a people’s movement. Bank employees are going beyond call of their duty, restaurants and dhabas are offering free meals to those stranded without cash. From college students to housewives to daily wage earners to retired senior citizens almost everyone is going about their lives with stoic grace.

Some college students told me, ‘This (scrapping 500 and 100 notes) is good.  We will live in a better India’. A man at Chai tapri said ‘people making fun of Modi’s foreign travel don’t know what he is doing’.

The quips and jokes circulating on Whatsapp also reveal what is on people’s minds. ‘A well known politician has so many scrapped notes that he will manage to earn crores by selling them as kabadi ( trash). He was checking out kabadi rates on Tuesday night !’  Another person requested his contacts ‘Please don’t palm off old notes to your subjiwali etc. They may not have bank accounts to exchange notes and will face difficulties.’  Another quip, ‘I never knew a PM has so many powers’ -mockingly attributed to a former PM.

Indians are forming lines in front of ATMs and dispersing with disappointment, but with determination to behave well, when cash gets over.

As it would happen, there have been a few unfortunate instances. A few hospitals and doctors refuse to accept cheques. This too is understandable. There have been some unfortunate deaths in the aftermath of the currency shortage.  Hopefully, there will be mitigation of handling emergencies and starvation. For example, Maharashtra Government has ordered private hospitals to accept cheques (Read )

People also express concern that some businessmen and accountants might subvert the demonetization by laundering old notes via gold trading or payments in cash to low earning individuals. They are also apprehensive that wily politicians and businessmen will be back to their old games.

The demonetization project is still work in progress. It has earned praise from economists and global media. But much needs to be done. And much will be done.

PM Modi tapped into people’s frustration and anger about 60 years of Congress’ misrule that left India tottering on the brink of disaster. He didn’t stop after winning an election. Through his meticulously planned agenda he has increased his credibility. First proof of this came when lakhs and lakhs of Indians gave up LPG subsidy after his appeal. He helped people overcome their cynicism by optimism and willingness to do their part for their India.

Last Tuesday, PM Modi again staked his credibility to ask people for their cooperation in weeding out the menace of black money, corruption, and terror funding. He also has given some indication of his next step on benami properties.  Indians have responded magnificently to their Prime Minister’s call. A government project has become a people’s movement.

India’s economy and political economy are undergoing massive changes. Opposition parties are still grappling with them. These are big areas and are subjects for separate articles.

In world’s history there are very few parallels to the miraculous transformation of India that is underway.

Also read:


This article was first published at here:

A silent revolution is going on in India’s noisy democracy

India is leapfrogging into future, ahead of advanced economies. It has been charting a unique course. It opted for democracy and universal franchise. It missed the manufacturing bus but it took the services flight. It ushered the green revolution and milk revolution. It started with a government dominated economy and switched a market economy. It has now taken up unfinished work in manufacturing and agriculture. It has followed a bewilderingly zigzag course.  It is becoming increasingly clear that India is getting its act together under the leadership of PM Modi and his government.

India’s Aadhar has entered record books as the world’s largest identity database. ISRO’ satellite launching capabilities have attracted commercial inquiries from some countries. Our UPI (United Payment Interface) technology is being patented. The world sees India as an island of growth and a responsible global citizen. But much more is happening.

A silent revolution is going on in India’s noisy democracy. So silent that it easy to miss it amid our politics of protests.

India’s capacity to transform itself is getting better.

It is well known that PM Modi is a big advocate of technology. But we need to take time to understand the scope of what is going on.  No other big society or civilization is absorbing technology in so many fundamental ways. It is so pervasive that it is not merely about technology anymore.

Indian State is modernizing. India’s leaders are driving changes from top. That’s not all. Indians are changing their ideas about themselves. Technology is coming to aid of our democracy.

By leaps and bounds

People have got used to convenience and speed of online shopping, online ticketing and internet banking. Gone are the days of cheques lost in transit and physical share certificates not getting transferred due to mismatch of signatures. Certificates of birth, education and documents like vehicle registration, driving license, and passport will soon exist only in online form via the Digilocker. When fingerprint and IRIS scanners become ubiquitous through smart phones and terminals, signatures and paper copies of identity cards etc will be replaced by Aadhar based authentication.  Already, a payment bank and a telecom operator have launched their e-KYC based on Aadhar. No Indian will be excluded from this convenience since almost everyone has Aadhar identity.


A unique 12-digit code assures every Indian that what is meant for her will reach her and no one else can impersonate her. When voter cards get linked to Aadhar and when Voting machines get equipped with scanners bogus voting will be gone.

This may take time but people, who by now have good sense of what technology can do, will start demanding the above. They will no longer be content in receiving subsidy benefits in their MUDRA or other bank accounts.  They will want all that is possible.

Today shipment of a parcel by courier or even a passport being issued can be tracked online. The Supreme Court has directed all states to upload FIRs (First Information Reports) within stipulated time limits. When FIRs are online, people will surely demand to know progress on them. Tomorrow, when they file a police complaint they will want to track its handling by police on their phones.

Similar changes and demands for quicker and quality services meant for personal businesses and small, medium, and large enterprises will be there. Quicker registration, transparent approvals, consolidated returns and their processing will be demanded by businesses. Internet banking and credit and debit cards will be supplemented by UPI (United Payment Interface) for person to person transfer of money which will be of great help to personal businesses who can’t afford payment gateways for cost and procedural reasons.

The UPI adds the last mile convenience to MUDRA and other types of bank accounts seeded with Aadhar for paying and receiving payments and for obtaining or repaying loans.  Imagine craftsmen and artisans who don’t have credit card terminals or payment gateways selling their wares online (thru e-commerce platforms) or offline and getting paid instantly through the UPI. Imagine farmers selling their produce via the National Agriculture Market and getting paid via their UPI accounts. Imagine budding authors and artists selling their works and getting paid via UPI.

The GST (Goods and Services Tax) implementation has begun. GST will run on its network called the GSTN. The GSTN will be a super database that captures all business transactions involving goods and services provided from one corner of county to the other. GSTN will help to bring convenience to tax payer businesses and individuals and also to the tax collectors. Furthermore, GSTN’s Big Data that captures Indian economy in almost real time can be leveraged for policy making and spotting specific interventions needed. The possibilities of what can be done are huge.

Digitization of land records based on GIS (Geographical Information System) mapping is going on. If this is integrated with authenticated property ownership databases of local and state governments, a revolution similar to Aadhar can be brought to property and land transactions. This will enable genuine and faster real estate transactions, reduction in black money generation, and reduction in litigation.

India is moving from data deficient state to data rich state.

The ‘data riches’ of India and demands by people will create new business opportunities in private and government sector.  These will range from personal services to non-intrusive detection of tax evasion and other illegal activities through data analytics as needed by the governments.

Digital Infrastructure

All these services will ride on India’s vast mobile and fixed line network that is getting upgraded to 4G and the National Optical Fiber Network (NOFN). The NOFN plans to bring internet broadband to 600,000 village gram panchayats. Though this program is much behind schedule, there is no doubt that Modi Government will revisit the program’s technology strategy for speedy implementation.

India’s own GPS (Global Positioning System)  called GAGAN (GPS-Aided Geo Augmented Navigation) has been launched. It will provide high precision information of latitude, longitude, altitude, velocity and time of vehicles or devices equipped with GPS receivers. This will bring all round improvement in navigation and tracking on land, in air, and on seas. For example, it is expected to significantly reduce the time interval that must be kept between successive takeoff or landing of aircrafts. This will have direct impact of airports’ capacity to handle traffic.

Under the National Supercomputing Mission a supercomputing grid of over 70 high performance facilties will power research in academic and R & D for solving multi-disciplinary problems using tools like Artificial Intelligence and big data analytics.

Citizens will demand better services and better laws because they now know it is possible

As citizens’ taste power of information and technology, their demands will cover bigger and bigger circles of public services like town planning and land use, construction permits, roads, sanitation, providing birth and death certificates, law and order services and many other services provided by local, state, and central governments. Many of these services are already provided online but citizens will demand speed and quality because they know it is possible.

Authentication (of people, entities, and properties) and capturing transactions and movements will result in better surveillance and prevention of crime. It will also help in faster investigation and better prosecution and conviction rates. Law enforcement will receive a big boost.

Today India has abundance of laws and a huge deficit of their implementation. This will change. As laws start getting implemented their flaws will come to surface and citizens will demand better laws.

If you listen in on social media you will find that our Judiciary is being criticized for what are seen as its opaque, feudal, whimsical, quixotic and glacial ways.  Demand for fairness and speed will create public pressure on our courts too.  In future, we should be to able track repeated postponements of court hearings. We should be able to see if courts follow their own norms. We should be able to have ‘distance trials’ of at least of civil suits and avoid repeated visits to courts. We should see judges using modern tools of searching legal databases and coming to quicker and fairer judgments. We should see much more from our courts.

Modi Government is driving sweeping changes top down. It is showing a glimpse of what is possible. The possibilities are enormous and Indians want it all.  They will demand more and more. For this, they will have to participate more.



India is now on a different course. The inevitable missteps and hurdles will have to be overcome. There will be concerns about privacy and data thefts. These will have to addressed. India’s enemies may resort to  cyber warfare (read ). India’s digital economy will have to be made resilient to cyber attacks.  We will need technical, managerial, leadership pools of high caliber.

Technology can be a binding force or it can unleash breakaway forces. Therefore we need a strong cultural firmament and modern practices based on our Dharmic principles to hold this all together.

All such challenges will have to be overcome.

Yet, it is evident that India is leapfrogging ahead of advanced economies through pervasive use of technology in governance and public services. Indians are switching from being beggars of State to being participative and being demanding citizens.  This is a massive change. The world hasn’t seen anything like it.

(This article was first published by here:  Image source: )

Why are Interest rates not being cut despite of Consensus across the board?

This article written by me was first published by here

Raghuram Rajan has challenged his critics of high interest rates. He has asked them to prove that inflation has fallen. He has quoted consumer price index (CPI) data to argue his case. There are arguments about whether CPI should be used for setting interest rates or WPI (wholesale Price Index) should be used. Some economists will also show you that there wasn’t such high inflation in the first place. There are those from the government side who argue that lower interest rates are necessary for economic recovery. Industry associations too argue for lower interest rates.

Thus there is a consensus among mainstream economists, business press journalists, business lobbies, finance and commerce ministries of the government that interest rates must be brought down for economic growth.  This consensus has lived through UPA years and the present NDA years. Recent revelations by former RBI Governor Subba rao show that “Both Pranab Mukherjee, now the President, and P Chidambaram pressed for interest rate cuts to revive investments even though accelerating inflation called for the opposite.“(Read)

BJP leader and MP, Subramanian Swamy has said that Rajan is responsible for suppressing economic growth and hurting Indian businesses and job creation due to his insistence on high interest rates.

It seems that the RBI’s, irrespective who is at its helm, have been a lone discordant voice against a great and rare consensus for lowering interest rates.

Interest rates act asymmetrically on growth

High interest rates may impede growth but lower interest rates may not automatically spur growth. The developed world gives ample evidence of the latter. Even in India, rate reductions made no dent on growth. Whatever growth India has achieved has been due to Modi Government’s successful push for infrastructure, Make in India, Ease of Doing Business, and higher FDI etc. Direct Benefit Transfers and Mudra loans may also have contributed, but we have no data on this.

On the other hand, when interest rates are raised they have faster effect of slowing down.

Effects of interest rate raises and reductions on growth are not symmetrical.

Interest rates reflect efficiency of economy

Interest rates are more of an effect of certain things, rather than being merely a determinant of growth.  High interest rates are caused by friction or drag on movement of money. There are several sources of this friction.  At micro level, goods take much longer to travel in India than in the developed world because of conditions of roads and multiple check points for tax collection. At macro level, we know that our decision making processes are too long winded -whether it is the GST legislation or court cases it takes decades. Project approval and clearances take long.  All such things lock up human and financial capital. They impede flow of money and delay benefits. The result is higher interest rates unless money is printed.

Rewind to 1987. For purchasing an apartment, I obtained a housing loan at the interest rate of 14.5% for 20 year tenure. These days’ home loans are available for at sub 10% rates. This 4.5% or more reduction has taken place through various ‘tightening and easing’ cycles of interest rates for almost three decades. In my opinion, the main reason for this secular reduction in interest rates is economic liberalization forced on the Rao Government since 1991. It became progressively easier to build factories (though it is still difficult to shut them), receive and send Forex, buy cars and two wheelers of choice, get telephone connections, book travel tickets, send and receive payments, hold video conferences and do countless other things. Things have become faster, friction in the economy has gone down.

Black economy imposes costs

There is another big factor -the black economy. Estimates for the size of black economy vary but one can reasonably assume that its size is quite significant. The black economy creates friction because of conversion costs, delays, and Forex round tripping etc. Black money also leads to poor allocation of capital. Black money finances crime, drugs, and terror adding to enormous social costs -these effects are rarely estimated.

Inefficient banks

Our banks, particularly public sector banks, are inefficient, they need higher than normal interest rate margin to stay afloat.  Bad loans impose costs and huge friction on flow of money. (Read Will India’s Economic Juggernaut Stall? )

When above causes of friction are removed, economy will be more efficient and a stage for lowering interest rates will be set.

Is our inflation still high?

If you are a blue chip company you may ‘see’ a low inflation. Your raw material costs have dropped, you can raise foreign capital at low rates, but cost of Indian capital stays high for you.

If you are a common man, the answer is yes. Cost of food items keep increasing with some exceptions. In the last two or three years, cost of a cup of Chai at road side tapri is gone up by 50% and that of a hair cut in a modest saloon has gone up by 40%. Prices of rail, bus, and air tickets are increasing. Prices of all types of services are increasing. All this is happening despite a worldwide slump in commodity prices. There is no respite for common man. Rajan’s 5.6% CPI feels like much more like 10% on ground.

Lowering interest while retail inflation stays high is bad politics

If you are a business with proportionately large amount of capital locked you benefit from lower interest rates. But lowering interest rates may not revive your demand -as housing sector shows. Previous rate reductions had little impact in housing sales. If you are an exporter a lower Rupee on account of lower interest rates might help you -but as the last 18 months’ experience shows, this is far from certain.

If you are a common man, lower interest rates will reduce the interest you get on your savings. You will be particularly hit hard if you are a retired person living on interest on your savings or fixed annuity. You will be hit by lower income and higher expenses. This, in fact, may be happening now and may be cause of low demand.

Reducing interest rates when the real economy is not ready (means friction for transactions not lowered enough) will encourage inefficient businesses at the cost of efficient ones and at the cost of the hapless individual savers -not a wise thing to do. It is illogical to do it when our country is crying for capital (If not, why do we need FDI?).

Reducing interest rate when inflation on the street is still high, will be bad politics for Modi Government. A few jobs that will be created will not compensate for angering the fixed income or interest income classes. Moreover, artificially low interest rates won’t be sustainable. They will cause another cycle of poor growth. Modi Government won’t like this, since it aims to stay in power for two or more terms.

Economy is not growing fast enough because it isn’t ready

If the economy is not growing as fast as some people wish it to be growing, it is because of lack of demand as many have pointed out. Lower interest rates will not stoke consumer demand except in case durables like automobiles and housing (even this has not happened due to very imperfect housing market). It may benefit some businesses more than others through lower interest costs but it will not have much impact on bad loans.

The good thing is that India’s economy is becoming more efficient due to Modi Government’s many initiatives mentioned above.  GST, better highways, dedicated freight corridors, more efficient Railways, better air connectivity, rollout of nation-wide broadband, building agricultural supply chains, and better availability of electricity will reduce the friction to transactions considerably. Technology based smart tax administration, stringent laws related to black money, and national electronic payment systems will bring more transactions in the main economy.

What needs much more attention by Modi Government is improving housing sector by bringing transparency and speed in land and building related records, buy and sell transactions, and approvals. Realty market needs to be brought on the level of stock markets. That’s a long way to go. Same thing needs to be done in agriculture market.

An alternate view

The economy is being readied.  As this happens, the cost of money will come down, ground level inflation will come down and the conditions for lowering interest rates will be there. Institutions like RBI should develop better tools to gauge this and start lowering rates then.

The RBI Governor is hinting at some of these things but he is not telling it to us properly. It will be far better if our Finance Minister educates us in this way.  He should also influence RBI and other institutions to develop better leading indicators and tools for understanding changes in economy instead relying on CPI or WPI kind of crude methods. He should hold RBI more accountable for its job of supervising banks. But he should avoid pressurizing the RBI Governor on interest rates.This will be good politics too. 

Brexit blizzard blows away the fig leaves of ‘Left Liberals’

This article written by me was first published on here

Like waking up from a nightmare and finding it to be a horror story, Brexit is a now cruel reality for public intellectuals, institutions, and markets.  The World markets got it all wrong. They panicked and lost US$ 2 trillion in value. Central Banks have now rushed to ‘calm’ the markets with their hands on triggers of quantitative easing.  Merkel has called for avoiding knee jerk reactions. Obama has said that the special relationship with UK remains despite Brexit.

Other reactions are:

‘A bad day for Europe’

‘Could do real damage to UK science’

‘Openness of World Economy in danger’

‘Brexit should be a warning about Trump’

‘Brexit doesn’t mean Trump will triumph’

‘Millennials fury over baby boomers’

‘Brexit makes US the last hope for liberalism’

‘Xenophobic parties not dominant but there politics will go on’

No one is welcoming it, so it seems.

To an Indian, Brexit and reactions to it can be bewildering. The fact is that Indian markets too have nosedived. Both stocks and Indian Rupee have come down.

People from big countries may deride UK as a group of tiny islands, but it is world’s fifth-largest economy.  It has powerful military and intelligence capabilities. It possesses nuclear weapons. It is US’s most important go-to-ally when it needs to impose sanctions against some countries. UK contributes handsomely to NATO alliance.

You don’t mess around with such a nation -not for long. That’s what a German-French dominated EU did under the garb of liberalism, openness, globalization, and free movement of people.  UK’s ruling elite got sold.

Over the years, more and more power has shifted to Brussels. Key decision making bodies in Europe are mostly unelected and not accountable to national governments. The EU is run by an unelected supranational commission. EU commissioners are not accountable to the member states. They cannot be recalled by the member states. They break all allegiances to the member states once appointed.

UK trades more outside the EU than with EU countries. Yet UK’s businesses must comply with EU’s red tape and regulations. UK can’t join a trade block on its own.

The straw that broke the proverbial camel’s back must be the unchecked immigration of people from 27 member countries who can come to UK without having confirmed jobs. The specter of Islamic terror that comes on the back of refugees from countries like Syria etc. also must have scared people in UK.  Presence of immigrant Muslims has caused authorities in Europe to issue advisories on dress codes, movements at night, and other social customs to ‘accommodate’ them.

So it is like -people in UK are saying, “we don’t like globalization because it affects our identities, the way we live, and our culture. We can manage economic downsides if any. We don’t see its touted benefits. In any case we don’t believe that leaving EU will be an economic disaster. We don’t buy that argument.”

The US under Democrats and the EU overwhelmed by leftist liberals have used their powers to overrun local economies under the garb of globalization and open trade. While they talked social good they allowed banks and their managers to play with public wealth and destroy it. They rescued the banks with more public money and no one got punished.   They used their powers to overrun local cultures by letting Islamists roam free and give cover for terror and other crimes.

A majority in UK saw through the fig leaves of globalization and liberalism and decided to call the bluff.  Public Intellectuals -those who live on public money and who have no skin in the game – in the world and in India are predictably upset.  With A Trump looming large, further break of EU being a possibility, and nationalism as a defining framework in India, we are going to get more and more lectures on Xenophobia and dangers of nationalism.