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

This article written by me was first published by myind.net 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. 


Will India’s economic juggernaut stall?

This article written by me was first published at https://www.myind.net/will-indias-economic-juggernaut-stall

India’s economy is in limelight due to its performance which is head and shoulders above its emerging market peers. Its GDP grew by 7.9% in January-March 2016 quarter. As recent corporate results show, there is a broad based recovery helped by lower raw material costs and rise in discretionary consumption (Read). This has come about despite successive droughts for last two years. It has happened due to public infrastructure investments, rising FDI due to Make in India and Ease of Doing Business initiatives, and a big turnaround in power and mining sectors. The credit for this turnaround must go to Modi government.  A normal monsoon this year should help things further. The massive Jan Dhan Mudra platform should give a leg up to economic activity at grass roots level.  Although global environment for exports remains difficult, all these factors point to a strong economic performance in years ahead.

Banking bottlenecks

India’s economy can hope to have a dream run. But our banks and financial institutions pose significant hurdles. Banks are intermediaries that pool savings and channel them into credit for economic activities like investments, working capital etc. Banks can help or hinder growth. Unfortunately banks are hobbling due to a mountain of bad loans (Gross NPA) of Rs 5.7 Lakh Crore (Source: Financial Express June 1, 2016). (Read) India’s economy is not just expanding but it also undergoing massive transformation due to both top-down (e.g. FDI led, investment led)  and bottom-up (through small business loans and faster subsidy transfers)  forces.  Our public sector banks, which dominate the sector due their sheer size, can’t match the needs of our economy.

The banking bottlenecks exist already. As economy keeps coming out of a deep and wide trough the bottlenecks can pose serious hurdles. When the real economy of industry, agriculture, and services doesn’t get enough credit to keep moving faster, shortages result. Shortages lead to inflation leading causing rise in real interest rates. The economy starts stuttering.

The above scenario is quite plausible.

The ‘Rajan’ debate

If the above scenario is considered, the current ‘debate’ on Raghuram Rajan’s tenure does seem strange.

Ever since the BJP leader and MP Subramanian Swamy fired salvos against Raghuram Rajan, the Indian and Foreign Media have come to Rajan’s rescue. He was appointed as RBI Governor in 2013 by P Chidambaram, UPA’s Finance Minister. Even the current Finance Minister, Arun Jaitley disapproves of Swamy’s criticism.  That Rajan is the best performing RBI Governor has been argued without any performance yardsticks (Read). Those who support Rajan talk about ‘his reputation’ and ‘sending positive signal to international investors’. “He is very well respected across the world. He is a very capable person and I think if his term is extended then it’s a good thing for India,” said Adi Godrej Chairman of Godrej Group (Read)

It is interesting to note that the ‘Rajan debate’ started only after Swamy raised his objections. No one is also discussing responsibilities for the banking mess.


Bad loans and the new financial landscape

Amazingly, Public Sector Banks’ huge Non Performing Asset (euphemism for loans which will not be paid back to banks) crisis gets discussed without any reference to Rajan and his role. One exception to this is the Supreme Court.  “Its (RBI’s) role in regulating the banking sector has come under scrutiny by the SC. Last month, it slammed RBI for not being “bothered about the mounting bad corporate debt.” It reminded RBI of its duty as a watchdog and wanted it to make public the “mind boggling” outstanding bad loans, even if it didn’t want to name defaulters who owe over Rs 500 crore to banks. It told RBI that “if a bank does not manage funds prudently and there is no hope of recovery, what do you do? Aren’t you supposed to keep vigil and take action if banks violate guidelines or are found in the wrong?”  However, RBI wriggled out by saying it does not monitor daily functioning of banks” (Read)

To be fair, Rajan has flagged the bad loans problem and has asked banks to provide for loan losses. But is this going to be enough? The following questions need to be answered.

1. How much of the bad loans can be recovered? How?

2. What caused them? Shouldn’t those who caused the bad loans willfully be probed and brought to book? Shouldn’t the bank boards which presided over such a massive problem be held accountable and changed? (Example: Vijay Mallya episode)

3. What is needed to prevent creation of further bad loans of such magnitude?

4. How to make banks more efficient and nimble to adapt to changing market conditions?

India’s financial sector has seen a lot of progress like establishing modern stock exchanges and fast electronic fund transfers. The Jan Dhan/Mudra platforms are giving a massive boosts to subsidy transfers and small loans.  New universal payment systems are coming up too.

Are our banks, particularly the public sector banks, equipped to deal with this entirely new landscape? Unfortunately, not much has changed in how our public sector banks do business. Nor they are in any position to undertake systemic and technological changes. As an example, technology makes it possible to mine formal and informal credit information of potential borrowers and help faster decision making. Do we see our Public Sector banks making use of such technology anytime soon?

What do we get from RBI and Bank Boards’ Bureau?

The regulator RBI and the PSBs’ major shareholder Government of India should be busy with the above issues.

Despite some bad loans that seem scandalous, Rajan says “Separate morality from NPA clean-up” (read).  Not much is heard from Vinod Rai, Chairman of the Banks Board Bureau. For Rai, the issue is how banks can sanction more credit without getting bogged down with audit questions. “We have given them comfort… You will see from the next month onwards,” he says (read)

Government has launched ‘Indradhanush’ program, but its progress is slow.

We also keep hearing about consolidation of public sector banks. Will merging large weak banks with small weak banks make things better?


Syndrome of ‘Banking Business as Usual’ will cause difficulties

Instead of discussing the above questions, Indian media, expert economists, Finance Minister, RBI, and the Banking Boards Bureau Chief have reduced the entire subject to:

1. Bad loans were caused by poor economy. So banks should take a ‘haircut’. There is no moral issue here.

2. Banks should recapitalized through public money (or even better: sold to foreign funds)

3. Interest rates should be reduced.

4. The problem will be less acute or will even go away with economic recovery.

5.  Consolidate public sector banks to create a few larger banks.

Government has launched ‘Indradhanush’ program, but its progress is slow. It sticks to the above macro-economic analysis that ignores weaknesses of public sector banks mentioned above.

With Rajan saying ‘No moral issue in bad loans’, Vinod Rai ‘Giving comfort to PSB managements’, and Arun Jaitely disapproving of ‘personal comments about Rajan’. It is business as usual.  Even if we don’t have a proper banking crisis, our banks are likely to put brakes on economy’s juggernaut that has started rolling.

Will India’s economic juggernaut stall?

PM Modi has said that ‘Appointment of RBI Governor is an administrative issue and it shouldn’t concern media’.  One hopes that this means that he will not get influenced by media’s love for Rajan and by his ‘reputation’.  One hopes that Modi recognizes the above threat to economic progress and preempts it. After all, Modi’s ‘Sabka Saath, Sabka Vikas’ hinges on ability of financial sector to support the real economy.

Modi government has been doing a lot for reviving India’s real economy. It is going to be much harder to do the same for its financial sector. If this is not done in time, the good work being done for real economy will not be enough to bring desired results. We may just have a cyclic recovery followed by a bust.

The time to act is now.

– See more at: https://www.myind.net/will-indias-economic-juggernaut-stall#.dpuf

What might be PM Modi’s game plan for 2019?

Part 6 of series on #modiplan (Final part)


Links to previous posts in this series

Scenario 2019: 


Criticism of Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/30/modi-sarkar-areas-of-my-concern/

In praise of Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/28/modi-sarkar-priority-security-and-economy/

My expectations from Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/25/pm-modi-my-expectations/

PM Modi confounds both critics and admirers: https://raverantreflect.wordpress.com/2015/11/21/pm-modi-confounding-critics-and-admirers/


These are updates to my article https://raverantreflect.files.wordpress.com/2015/10/pm-modis-game-planver1.pdf published on Oct 8, 2015 and some updates . The above article was written before the Bihar Elections and the stunning defeat of Modi.

Update (December 3, 2015) : Gujarat civic polls has seen BJP maintaining its hold in urban areas while Congress has made inroads in rural areas.

What might be PM Modi’s game plan?

Does the scenario presented in the part 5 assure Modi a win in 2019? My answer is NO. Let us see why.

He won the 2014 election because of

1) Strong and wide spread anti-Congress sentiments

2) He embodied aspirations for better life of all and his Gujarat track record gave him credibility

3) Support by all those who stand for Hindu civilization as a soul of India. mainly BJP and RSS cadres and other supporters

4) Social Media helped consolidate all above and overcome main stream media’s campiagn against him

Despite these factors causing a wave , BJP could get just 31% of votes in the last election. In a first past the post system of elections 31% votes may be enough to win large number of seats especially if there is no strong second party. We can infer that without any one or two of above factors he would not have won decisively. I call it a Tripod phenomenon.

By 2019 :

1) Anger towards Congress will have gone down considerably as long as Congress doesn’t do something really foolish and terrible. Also it will most likely be a non-crisis situation for India.

2) Lives of a large section of poor will have improved. (Please read the Scenario 2019 post for more details). But gratitude is not an emotion which lasts long and absence of justice won’t help matter. Despite many theories, I think that Indians don’t vote for good work. Not for the kind of good work the economists and business people favor.

3) Many of those who stand for the Hindu soul of India will have been in angry or despondent mood. Our patriotism comes to the fore when we play cricket against Pakistan or when there is an over war. At all other times we think only of ourselves, our families, or caste, or religion in case of minorities. We don’t take pride in being Indian. Even if we do, our pride doesn’t translate in doing good job, following rules meant for common good, and doing good for society our country. Compare this with the pride with Germans, Japanese, Koreans, Chinese, or Americans behave even as they take care of themselves. Our narrow selfishness usually overrides all other considerations. This has nothing to do with education or economic well being. We find this in affluent classes as well. This translates by default in low voting percentage.

4) The BJP’s trajectory doesn’t look good as a party which can put out across government’s good work or as a party which can counter oppositions political tactics or as party which is a step ahead of opposition. (Please See Scenario 2019 link above for more about the BJP) (Update December 8, 2019). BJP’s arrogance and laziness (it was a lazy opposition too -barring some exceptions and until Modi arrived on national scene) is already putting off its supporters.

5) Social media will not be enough to counter anti-Modi media. Polling percentage can fall in a non-crisis situation particularly when we haven’t built a strong national identity. When there is no emotion driving us local, caste, religion factors dominate. I have said that gratitude is not a strong enough emotion to make people come out and vote.

The above scenario doesn’t look rosy for Modi’s second term because he has come up on a Tripod Support.   Even if one leg wobbles, he will be shaky. It will be a pity, because he likely to be the best PM so far. Remember, even Atal Behari Vajpayee lost in 2004 despite doing well as PM and despite being seen as secular.

It is safe to assume that the PM knows this. He is much ahead of most (should I say all?) of us -as Raghuraman Rajan recently said. He is also a very quick learner. Therefore it is quite likely that he will make directional corrections. His repeated statements that his government is working to a plan gives credence to this.

Next wave of actions

What will he do that we haven’t yet seen? It is a matter of speculation.

He will  focus on what can be done and be visible in next four years .

  1. We are likely to see much better actions on black money.
  2. We are likely to see good actions in agriculture sector.  I expect that Modi knows that rural votes still depend on state of agriculture no matter how well ‘Make in India’ takes off. There have been some tentative steps on APMC s etc. Expect more comprehensive actions. These things take time. He has to find right people too.
  3. In Silicon Valley he said that ‘Governance is going to be his first priority’. We expect major administrative changes in the ministries concerned with all the areas where progress is poor.  We can expect induction of more talent through lateral entries, even at the cabinet level. There have been many changes in the Finance and Home Ministry. His Goverment has been dismantling the the sleazy nexus of power, cash and influence at the heart of the Delhi Durbar. Read this http://indiatoday.intoday.in/story/transfer-posting-raj-ends/1/531599.html Many of these changes don’t grab headlines but their effects will be seen soon(update December 8, 2015).
  4. His party, the BJP has so far not been a match to the Congress and its eco-system. He will know that the the battle for the second mandate won’t be won using social media and non-party support alone. So we can expect BJP organization level actions.  There is no evidence so far. But we will see some actions in next two or three months.
  5. We can expect more from Modi Government during last two years of his present term on corruption. We are likely to see prominent Congress leaders and other big fish to be brought to book. (Update December 7, 2019 NH case against Sonia and Rahul Gandhi is gathering pace. Also see http://indiafacts.org/and-you-thought-modi-was-doing-nothing/ for more info various Big Fish cases) This has been the demand of Modi’s supporters and many others. The unchecked crime and corruption by the big for all these sixty years has been the root cause of cynicism of Indians and anger towards the Congress. The Modi Sarkar wasn’t seen to be acting decisively in this area. This will surely change.
  6. Expect Netaji files to be declassified. (Update: around Diwali 2015 PM Modi announced that Netaji files will be de-classified on Januray 23, 2016 to mark his birth anniversary)
  7. Even if all the above things are done, PM Modi will still be on a vulnerable Tipod. He is trying to win new support base outside his core nationalist base.  There is no evidence yet that he is succeeding.  If this is so, he will have to give strong emotional reasons for us Indians to go out and vote for him in large numbers.
  8. His handling of Pakistan has confounded both his critics and admirers. The Congress has been reduced to criticizing both cancellation of talks and sudden talks with Pakistan. He is trying to isolate Pakistan on terror charges and at the same time is seen to be engaging with Pakistan. He will keep everyone guessing. There is no doubt that Pakistan has been the biggest external bugbear for India for all times. It has inflicted huge economic and psychological costs on us while hurting itself. Pakistan is not just a rogue state, but is a state which is now at risk due to its own internal contradictions of supporting terror and fighting terror,  taking pride in being a Muslim State and killing Muslims. Its people are suffering.  

 PM Modi will surely like to solve the Pakistan Problem. Every Indian PM wished to be seen to be solving the problem. But PM Modi  has put himself in a good position for doing this. This will be one emotional reason for us to go out and vote for him again. (Update December 8, 2015)

India: Scenario 2019

Part 5 of series on #modiplan


Links to previous posts in this series

Criticism of Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/30/modi-sarkar-areas-of-my-concern/

In praise of Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/28/modi-sarkar-priority-security-and-economy/

My expectations from Modi Sarkar:  https://raverantreflect.wordpress.com/2015/11/25/pm-modi-my-expectations/

PM Modi’s confounds both critics and admirers:  https://raverantreflect.wordpress.com/2015/11/21/pm-modi-confounding-critics-and-admirers/


I will try to paint a plausible scenario of 2019 here. I will follow it up with what might be PM Modi’s game plan in my next post.

Excerpts from article https://raverantreflect.files.wordpress.com/2015/10/pm-modis-game-planver1.pdf published on Oct 8, 2015 and some updates . The above article was written before the Bihar Elections and the stunning defeat of Modi.

Update 9December 3, 2015) : Gujarat civic polls has seen BJP maintaining its hold in urban areas while Congress has made inroads in rural areas.

Likely scenario of 2019

From the above directional analysis it is very likely that India will do well (by 2019) in external security, economic growth, infrastructure development, social inclusion and job creation. The job creation, won’t be to the fullest potential due to some the above directional issues.

Based on what we know today, we will generate a much higher proportion of the so called clean energy but we are not likely to have cleaner air, water, and food. Many more people will have food. We will have more jobs but we will spend hours battling traffic on two wheelers. The smart cities when they come to exist risk being swamped by migration from farm lands. (because of lack of reforms in agriculture sector)

Today’s poor will have more and will be economically empowered. There will be less corruption, but we will not be yet moving to be a just society in which a poor man can knock the doors of justice and get it. The poor will get to consume more (that is good) but the greed of everyone else will continue increase. We will have green highways (trees along it) but our farmlands and hinterlands may remain barren.

The minorities may still continue to live in imaginary fear thanks to Congress, its clones and its supplicant media. India will not have discovered its Hindu* civilization soul. It would not have known its true history. It would not have known what was wrong about its past and what was good.  We will continue to be fed by, what Arun Shourie describes as Macaulay’s and Lenin’s Offspring (Indian intellectuals) and their respective overseas masters.

Modi will not have dented Congress culture** much whether in political or in economic space. Congress Mukta Bharat will not have been a reality by 2019.

BJP: (added this section on December 7, 2015)

The state of the BJP will be crucial if Modi is to win a second term in 2019. It is subject for a separate post, but here are some ‘directional’ clues:

  1. It was ineffective as opposition (barring Ayodhya movement and 2g \ Coalgate blockade of Parliament in 2013\ 2014)
  2. It is ineffective as a ruling party at center despite absolute majority. Same in states where it is power.
  3. Despite a record membership size BJP can’t mobilize public opinion. It allowed Congress to run away with ‘intolerance’ campaign based on sheer lies.
  4. It’s spokespersons barring exceptions are weak, inarticulate, fumbling type.
  5. It has allowed its social media expertise to evaporate \ migrate
  6. Most of its MPs and MLA’s are sleeping and inaccessible.
  7. Its bad performances in Bihar polls and Gujarat rural local body elections are guides to its future

Modi, despite his government’s good work,  will probably have to carry the NJP’s burden on his shoulders in 2019 too.

Modi’s chances in 2019

Given the above scenario, what are the chances of Modi Govt getting reelected in 2019? What more might Modi Sarkar do?  I will explore these questions in my next post.


* The word Hindu or Hinduism stands for the essence of our civilization -every human has a right and duty (Dharma) to seek own truth (God). All paths lead there.  The Sanskrit word ‘Dharma‘ means duty unto oneself. It doesn’t point any particular form of God, customs, codes, or laws. All these change and must change depending on context. That’s why Hindus have crores of Gods and more are welcome. That no one has right to kill, convert, or harass others on the basis a preferred god is implicit in the essence of Hinduism.

One can also use the word Sanatana Dharma or Vedik Dharma. Sanatana means eternal (not old). Vedas and much of the Hindu philosophical and social literature have been the earliest and the longest surving, and biggest open source endeavors known to mankind. One excellent resource is Portrait Of A Nation: History Of Ancient India by Kamlesh Kapur They aren’t old fashioned at all. In fact are they are more modern, progressive, and relevant today than the words like ‘tolerance’ ‘secular’ ‘plural’ etc -which are so limited.

** Congress culture: The culture of dividing and fragmenting on the basis of everything religion (partition), caste (reservations), languages (linguistic re-organization of states), ethnicity. The culture designing and perpetuating complicated system of controls, sops, exemptions, and discretionary powers for favoring or punishing. The culture of detesting anything that is Hindu and anything that predates the Muslim and British invaders.

Modi Sarkar priority: Security and Economy

Part 3 of series on #modiplan

Excerpts from article https://raverantreflect.files.wordpress.com/2015/10/pm-modis-game-planver1.pdf published on Oct 8, 2015 and some updates . The above article was written before the Bihar Elections and the stunning defeat of Modi.

Signs of good progress in security and economy

India has done very well under PM Modi  in many areas. His foreign policy has helped improve external security environment. It has also secured substantial economic gains (surging FDI, for example) . PM Modi’s  foreign policy has been an outstanding success. Our relationship with neighbors are much better, except Pakistan.  Also, Nepal is a recent concern. Defense capabilities are being swiftly augmented with faster decision making. Terror attempts are being foiled and terrorists are being caught. We have also seen success in a unprecedented cross-border action (Myanmar)  Modi-Swaraj-Doval and their teams have done very well.

Domestically, many areas have improved. The power situation is much better. There were no summer blackouts this year -helped by Coal India’s revamp among other things. Ultra High Power projects, Solar Energy parks (ambitious targets), and Oil Exploration projects are being pushed.  So we should see good deal of additional energy availability in long term. The only area lacking progress here is the distribution sector which is lossy and unable to pay for power. The road construction (Highway sector) has picked up pace. The Railways are showing signs of a new life. I see pictures of clean bogeys and stations on twitter. Modi Sarkar is pushing project implementation -this year’s project starts and project spending is more by 50% over last year. The FDI is showing healthy trends (the best globally) thanks to Modiji’s travels and excellent salesmanship of Make in India’. State governments like Rajasthan, MP, AP  and TN are showing greater urgency in attracting investments. And one takes Gujarat for granted. They are also amending laws where necessary. All these and such things by themselves should give a boost to economy and job creation in short (this year) and medium term( next year)

Then there are bigger things that will ensure buoyant economy and well being of those who desperately need help. These are known as J. A. M. : Jan Dhan financial inclusion program, Aadhar unique identity card and Mobile Governance.

“As a part of this effort, the program Govt. aimed to provide 75 million unbanked adults in India with accounts by late January 2015. As of September 2015, about 180 million accounts had been opened; about 44 percent of these accounts did not carry a balance, down from about 76 percent in September 2014.  ” (source http://www.brookings.edu/blogs/techtank/posts/2015/09/09-fdip-report-results-india )

The potential benefits of direct subsidy transfer to bank accounts, linking of insurance, and small loan accounts are ‘huge cubed’. They will go beyond savings in subsidy leakage. You clean up embedded corruption, bring the poor in economic activity helping them to carry out their livelihood earning trades, and provide them small succor -all in one stroke. The positive energy unleashed at the grass root level will be unprecedented in India.

Though the Rural Optical Fiber Broadband network project is stuttering,  I expect big push to it because it is a part of the J.A.M. architecture. The Digital India initiative has received a huge thumbs up by Silicon Valley biggies (Google, Microsoft ) and professionals alike. The country’s digital and communications infrastructure should see a big overhaul in the long term ( 2 to 3 years). The e-governance and e-services should also see increasing coverage.

All above are signals of economic transformation at the high levels of the economy (public infrastructure investments, FDI, and hopefully, over next two three years, investments by domestic corporate sector ) as well as at the gross root levels (through J.A.M.) The charge that Modi Govt is Suit Boot ki Sarkar is proven to be baseless. 

The external security environment also has substantially improved. Pakistan is on back foot. China is being contained through the carrot of economic cooperation and a stick of strategic counterweights of Japan and USA. UAE has been persuaded for extraditing wanted criminals.

Thus there are signs of good progress in economy and security. Modi Sarkar’s big strength is implementation. This should help in keeping progress well on track.

I will describe the areas of concern in my next post.

Blackflation: India’s Inflation

Now that the inflation is cooling down as they say, every businessman and economist worth his millions is making a hue and cry about RBI not lowering interest rates. Even Arun Jaitley, our FM, is queering a pitch for interest rate reduction. I will argue against such a reduction.

Inflation as measured by statisticians is falling. But other than prices of petrol and diesel and onions (supply glut and storage issues) which prices are falling? Which price rises are moderating? House prices are still high, transport costs (truck rentals) are still high despite higher production of trucks, manufactured goods haven’t seen price moderation, services like telecom and internet are becoming costlier. Costs of travel by buses and rikshas remain high. In fact a proposal for bus price rise by 20% in Pune was recently shot down. Costs of eating out remain high.

If the demands (cars, houses, etc) are not picking up it is not because of interest costs, it is because people don’t save enough to service repayment of principal amounts. Real wages are falling and job creation is not picking up. Enough has already been written about structural reasons for lack of consumption and investment demand (labor laws, interstate trade issues, agriculture sector controls, land availability, costs of enforcing contracts, slow bankruptcy procedures etc.).

And all this talk is about the ‘white economy’. When the black economy is about 50% (estimates vary) in size  how can we ignore it? Do economists take into account the effects of black economy?

Black economy increases percent costs of white money by reducing the denominator (total money) and by increasing numerator (cost of money). Black money increases the taxation burden on white economy since avoiding taxes is its main purpose.

There is more. black money makes decision making inefficient. Greasing some palms for a speedy clearance may help black money funded cases but they scuttle countless other white money cases (which don’t pay as much). Black money also creates incentives for making rules complicated thereby bringing down processing speed and increasing costs of money (money stays blocked longer).

I am leaving out other pernicious effects (drugs, funding of criminal activities, funding of terror) of black money.

The main reason for higher cost of money is that we don’t use money efficiently despite our penchant for scrounging. Our supply chains and all economic making processes are slow (some have improved in last two decades) and full of friction and meandering ways. This is main cause of inflation (you want to charge more and more to cover for uncertainties and slowness in system)

Inflation (hence interest rate) has two components: (1) monetary (loss of currency’s purchasing power due to printing of money through deficit financing)  and (2) costs imposed due to inefficiencies in the system.

Do the economists take into account the second factor?

I would like to argue that black money contributes a lot to the costs of system inefficiencies hence to the inflation and interest rates for the above reasons. Therefore I would like to describe Indian inflation as “Blackflation”

Blackflation can’t be tamed by high interest rate but it is illogical to drop interest rate when costs of money are high. It will discourage savings, precisely opposite of what we need.

Economists and companies argue FDI as way out , so that you don’t have to fix black money (no body says that but that’s what it means). Promoting FDI without fixing blackflation is equally illogical and will make the problem worse.

Tackling blackflation through simplifying and cutting taxes, faster supply chains, faster processes, faster court verdicts and unearthing black money  is a long road and is a must. Quick fixes like interest cuts will not work.