Why USA (Trump) Leaving Paris Climate accord is good news for Environment

There is a sense of betrayal and shock among the Global community. President Trump true to expectations has pushed earth to the brink of doom by pulling out from the Paris climate accord.

Frustration and disappointment are understandable. Last time when we faced last big challenge to the environment i.e Ozone layer depletion in the late 80s and early 90s, it was collective action by Governments in banning CFCs, which stopped further damage to the Ozone layer. And good news it did stop damage to the Ozone layer.

So yes Ozone layer was saved, but was that really last big crisis related to the environment? Did we face that just one big black swan event on environment or we are in the state of continuous decline? Has global collective action made any impact on worsening climatic condition?

Whatever one thinks about climate change, the fact is that it is for real and we don’t need complex data/papers in scientific journals to feel the challenge of climate change. All we need to do is look around and see the damage as it happens for real. There is no need to sail and sense silent oceans, just look around the nearest water body and you can see it. Pause for a moment and think about birds, animals, insects that you used to see 15/20 years back and think about now! Birds have disappeared so does many plants and overall healthy ecosystem. The temperature in cities is on the upswing while rainfall has become very sporadic.

Hence the belief that Paris Climate accord will fix all the problems and by 2030 earth will be super fine again is flawed. This hypothesis is wrong at two levels.

One is on an individual basis. Question is “are we more sensitive to our environment as an individual? Are we driving less, consuming less electricity, using fewer electronics, not using plastics or creating less garbage? Forget about using less, the consumption of all these has jumped by 100% to 800% in the last few years. Even a company like Google, which claims to be champion of green actions, has pushed all its users in a habit of saving all junk data in never-ending Gmail storage boxes? Sensible consumption anyone?

For a moment, we assume that consumption as part of progress cant is stopped then what about affirmative actions? How many trees anyone has planted or know anyone in our social list who has planted a tree? Ok, not in the first degree of connecting than a second degree or third degree?

Hence to believe that Govt will save us from impending doom when all of us are busy pushing it to limit is nothing but the stupidity of first order or blindness or probably trait of our species as captured in this Matrix video.

The other problem with Paris climate fallacy is our sudden faith in Govt despite all empirical evidence of the exact opposite.  One need not to be a big historian to see that majority of big disruption / innovation which helped humans to move beyond a serious crisis, did not come from a some paper pusher bureaucrat but from private citizens who innovated and build next level of solutions be it medicine, electricity, transportation. Todays cutting edge innovation be it AI, driver less car, electric vehicles, drones etc – all are coming from private companies who are trying to solve multiple needs. Once everyone is clear that there is no magic bullet in form of Paris accord, which will miraculously save the earth in the year 2030, innovation will start and with adequate effort (capital + intelligence) we shall be able to solve it much better. Probably faster, better and cheaper!

Trump by his actions, has just pushed us closer to that solution!

Of Politicians, Bureaucrats and 52 ministerial knots in Ease of doing Business in India

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“Ease of doing business In India” seems to be stuck despite being the focus of present NDA Govt. PM Modi, determined to bring India in top 50 places to do business, has directed ministers/bureaucrats to reduce procedures/paperwork so as to improve “Ease of Doing Business” ranking of India.  However, despite all the push for last 2/3 years, India has merely limped to the rank of 130 from earlier 131( just 1 point) as per Ease of Business report released by World Bank. One wonders why has Govt not been able to solve this not so complex puzzle, despite present dynamic leadership and noble intentions and what could be the reason for such a dismal performance on this count?

Interestingly the answer doesn’t lie in the political leadership of present times but rather curiously designed governance structure of India which has been designed to rule than govern. The complex web of the system which on the face of it, appears to be a solution of all problems but in fact is the root cause of all problems plaguing India today.

Indian Govt as per its official website has 52 ministries, 16 APEX offices, 53 departments, and some 85 commissions, not to count State / Junior ministries, an army of bureaucrats and millions of govt servants servicing this large country (2nd most populous / 7th largest economy). However how many ministries (departments) the USA, an economy which is 10 times bigger in terms of GDP has? Just 15 departments and China, a country much bigger than India in terms of population, area, and size of the economy? Just 20 ministries and 5 APEX offices!!! Probably there lies the secret of governance or rather lack of !! One can fairly conclude given the state of affairs in India vs China / USA that quality of governance seems to be inversely proportional to the size of Govt.

A ministry or department once formed behaves like a living organism. It acquires its own identity, shape, and size where it needs energy (budget/power) to survive, grow and stay relevant. Unfortunately, more budgets are granted only if the ministry is more relevant/visible and there lies all the pain. To stay relevant, ministries draft more rules, notifications and circular so that more work is created and more budgets are allocated which in turn create more hindrance for normal businesses. For example, consider the case of the ministry of labor.

Ministry of labor in an ideal world, shall look after the welfare of labor and draft rules related to minimum wages (Ironically a state subject), monitor issues related to labor wages and work conditions. However if one just make policies and issue advisory, it reduces the scope of work and in turn, causes a reduction in budget and power. So ministry of labor does not only stop at labor issues but also worry about “Healthcare” and operates hospitals as well. No not ministry of health but it is the ministry of labor which focusses on providing world-class health care to the workers of India. It has a department called ESIC ( Employee State Insurance Corporation) which collects close to 6.5% of wages earned by an employee and use this money to provide healthcare. Are ESIC hospitals best in the country? NO. Are these hospitals really sought after by all workers? well NO. Is there a perfect alignment of interest among hospitals and workers? NO. Needless to say, the condition of ESIC remains pathetic like any Govt hospital with the poor quality of care, zero accountability, and dismal service standards.

So if there is no operational excellence, no benefit or advantage then why Govt needs to run hospitals and force more and more people to the path of ESIC rather than giving them freedom of buying health insurance and choose hospitals? Interestingly Govt rather than reforming ESIC, keep on bringing more and more people under its ambit ( new limit is 21,000 monthly wage) because core issue is not about the welfare of workers but about the power of labor ministry and ESIC. Without this massive operating outlay, the ministries will be faced with budget cuts / reduced power, a scenario abhorred by bureaucrats and ministers alike. This scenario is not limited to the ministry of labor alone. Every day, every ministry/department is busy thinking of the laws/rules which can increase intervention of the state to next level. Recently parliament passed a bill mandating employers to provide 26 weeks of paid leave to pregnant women in order to come at par with Norwegian countries, however little did the well-meaning minister realized that it will make married woman highly unemployable to small businesses and will again create a rush for Govt jobs with all these perks. There is another minister thinking of ways to control portion sizes served by hotels and list goes on!

PM Modi in his address to NASSCOM ( industry body of IT companies) pointed out that the success of the famed Indian software industry is not because of government but rather in spite of it. He said that IT industry grew as Govt had little understanding of the sector and by the time Govt took notice of it, it had become quite big. Unfortunately, despite such astute understanding, Govt continues to meddle in any industry be it hotels, small businesses or any other flourishing industry. One good example of Govt intervention is the launch of StartupIndia in the otherwise flourishing segment.

Startup India program was launched last year with big fanfare and in a year, we have Startup India events, Startup sessions and even a Startup India policy whose main highlight is that now a nodal body can certify startups!! With dept. at work with all ideas on nodal bodies/ministries/agencies, have startups in India taken off?? Well if one looks at data, 2016 was probably the worst year in terms of VC investments ( lowest in last many years) and policy confusion. So much Govt attention has only muddled startup scene as earlier startups like any other company were taxed on profits and now thanks to overactive Govt, they are getting taxed even on investments!! so much so for ease of business and proactive Govt!

This is not the case with the just ministry of labor or Startup India. We still have a ministry of Steel and we also have a ministry of heavy industries. We have a ministry of surface transport and also a ministry of railways. Tomorrow there will be a ministry of LCVs and then ministry of 22 fire trucks. Overall whole governance structure looks like a design lifted straight from famed British comedy “Yes Minister” which in Indian context looks more like Indian tragedy as the number of departments/ministries keep expanding and expanding.

So for a startup or any company, what will be the best ministry to deal with? MSME or DIPP ? or specific functional ministry depending upon core area ( Fin-tech, travel, Steel, Textile and so on so forth). Needless to say, with dozen of ministers / departments working at same matter in their parallel universe and none willing to lose an inch of control, things remain in perpetual gridlock as every ministry in order to remain relevant / powerful keep on adding its own notifications, rules, processes and thus kicking ease of business out of window.

French writer and aviator Antoine de Saint-Exupery once wrote that “Perfection is Achieved Not When There Is Nothing More to Add, But When There Is Nothing Left to Take Away”. Likewise, the ease of business can only happen if there are fewer ministries to deal with and not more and India can only improve its ranking if it reduces 52 ministries to 20 and eliminates the massive rusted bureaucracy ruling the masses in disguise of servicing them. Hence the Govt need to do the massive thinking and withdraw from the majority of areas rather than getting into every area. This needs a paradigm shift where the aim of government shall be to enable rather than to provide. An area which was well understood by PM Modi till 2014.

So the issue is why it is not happening and PM Modi, a firm believer in maximum governance and minimum government, has not able to solve this issue. And with every passing day, the present Govt looks more “House Trained” than ever ( As Sir Humphrey would have pointed out in Yes Minister).

The answer to this puzzle does not lie at the door of political leadership but at the door of Indian governance system design. India ruled for almost 800 years had an administrative system whose main task was to rule / or help rulers rather than providing governance. In 1935, Britishers relented and started giving natives a say in governance issue but the underlying system remained loyal to the masters in London. This system created an anomaly where the front face i.e political class became accountable for everything while back-end ie the bureaucracy controlled delivery as well execution of state powers.

Indian bureaucracy aka the iron frame of India became a behind the scene administrative machinery which on account of being “faceless, formless”  became a formidable supreme power where its members enjoyed all fruits of the power with full permanency and without any accountability (count the no of bureaucrats convicted/ arrested for failure in delivering their duties). The whole situation aptly summed by Sir Humphrey in Yes Minister  “Dear Bernard,  Ministers comes and ministers go. but we remain forever”. So while political class gets judged every moment and face change of order every five years, bureaucrats remain forever to provide continuity in governance. Moreover, the majority of Ministers/politicians remain servile to bureaucracy as politicians being new to administrative set up have minimal understanding of intricacies of governance due to lack of experience as well as due to lack of time (given very high public engagements).

Hence to assume that a politician will come and reform this rusted Indian service delivery system and usher a new era of policy thinking from this same tired, an entitlement seeking, generalist army of experts, is at best a mirage and worst a daydreaming on part of the Indian public. No politician or media or judiciary can do the required change and only hope is that India will get a strong header PMO secretariat/cabinet secretary who decides that enough is enough and he or she needs to reform this massive government rather than just demanding (and getting) more and more privileges for their clan.

History tells us that last time India saw some serious reform, it didn’t come from political class but from bureaucrats. T N Seshan as an election commissioner changed forever the way elections used to happen in this country, a former bureaucrat cut all the rules/regulations in 1991 economic reform and a strong CAG head turned all crony capitalism upside down with same system, same machinery, and same people.

Hence any talk or thought of bringing India among top 50 places to do business is going to remain pipe dream till present political leadership figures out a way to minimize this vast maze of ministries, departments, APEX offices, commissions and what not, and till then God save the king!

Startup wish list for Budget 2017: Leave us Alone!

Another Budget by NDA govt is in the offing and air is again thick with expectations. Like all years, every industry group is busy preparing wish list which generally boils down to a single point agenda of reducing tax rates and talk of level playing field and how this single reform i.e. tax rate cut will catapult their industry to leading position in the world, generate so many jobs, add so many basis points to the GDP etc etc. At the same time, mandarins at North and south block, silently whisper in the ear of finance ministry about worsening position of fiscal deficit, poor tax GDP ratio and need to collect more taxes in order to provide for poor and why Govt needs to be now ready for 8th Pay commission as it has come out that Indian bureaucrats are very lowly paid in comparison to bureaucrats at Singapore and USA in dollar terms. Indeed a very tough scenario for the finance minister to keep both sides happy.

However for a change, Startups / Investment sector rather than joining the usual annual chorus would like to strut solo guitar and like to chant “We need no tax breaks, we need no exemptions, hey FM, please leave us alone.

India seems to be on the cusp of startup revolution or rather was on the cusp of revolution. The present state of startup euphoria started in 2006 and saw the building of iconic companies like Flipkart, Paytm, Redbus, Citrus Pay and 1000s more with billions of USD getting pumped in this startups till the Govt took notice. Last year, we saw the launch of big “Startup India conclave” and single-minded focus of Govt in improving ease of business and create a conducive environment for startups. What is the end result? No of startups/funding in a startup is down by some 67% in last year alone. The number of tax notices issued to startups/funds issued in the last ½ years exceeds all the notices issued in the last 10 odd years. Earlier there was a tax only if a company used to post a profit, now startups are even taxed on investment raised (the only country in the world to do that). So much so for the benevolent attention of the Govt.

Overall it seems that Startups have got in the same league as farmers have been or to put in management jargon are the new “farmers” for the great Indian super Govt. In India, for the last 60 odd years, every Govt and its budget have one singular focus that is to work for farmers and improve their conditions. Billions have been spending on doing that with schemes, loans, policies and what not. What is the end result? Everyone connected with farmers be it experts, professors at agriculture universities, ministers, agencies, bankers have flourished except farmers! Farmers have continued to suffer and battle perpetual poverty and commit suicide while Govt focuses on farmers in terms of money and time just keep on increasing. Likewise, Govt focus on startups has brought a windfall on all stakeholders be it consultants, bureaucrats, bankers, event managers and all tertiary people except startups/funds. The consultants have been impaneled, lobby groups have been formed, nodal agencies have been constituted, huge budget allocations have been done with crores being spent in ad campaigns, while startup founders and fund managers are busy justifying valuation to tax authorities and being made to feel as hawala operators!

The reason for such state of affair is simple that Govt is looking at startups and doing that quite efficiently. The result is that there are now rules, then representations, then modifications and addendum and then more notifications with every organ of Govt at central and state level trying their best to add value and contribute their set of rules to already muddled water of startups. Probably only thing pending from Govt is a levy of startup cess on all investors and startups.

All this high involvement has only created a high level of uncertainty and confusion with rules changing every quarter and more and more coming every year. In decision theory, there is an interesting term “The Ellsberg Paradox “ which demonstrates that its the uncertainty, not the risk which makes people activity-averse and any investor or entrepreneur can provide for risk but not for uncertainty. Unfortunately, last many years of hyperactivity by govt in terms of ever-changing regulations / new and innovative form of taxes has created immense uncertainty in mind of entrepreneurs/investors alike and one is getting scared rather than encouraged to be investor/entrepreneur.

PM Modi in his address to NASSCOM in 2015 famously remarked that success of IT sector in India is not because of Govt but in spite of Govt as the government had no clue of IT sector and by the time it figured out the sector, it has grown in size multifold and became too big to be disturbed. Likewise, Startups were on a growth path till Govt took notice of it.

Hence it is high time that powers in finance ministry take notice of sentiments expressed by PM and rather than preparing to levy startup cess, listen to Pink Floyd and leave us – entrepreneurs/investors alone!

The End

The article was published in The Economic Times.

The Indian Sahibs

1/ IndianSahibs: A senior bureaucrat is checking at the airport but hold, it’s not him but his protocol officer and a CISF guard, who is checking for him.

2/ IndianSahibs: Custom official has stopped so sahib consort is threatening and name dropping on protocol. There people are busy on full tax payer salary. Incidentally, that means Airlines issued boarding pass without seeing the person – a big security hazard. Now why custom official – It is Indian airlines departure from the international side so the customs guy needs to stamp.

3/ An official abusing powers/ utilizing free man powerfully paid by taxpayers is more corrupt than any black money hoarder and on top of it, he is compromising security big time.

4/ and this tells what is wrong with India. We remain servile to officials while going gaga on small busmen eking out a living

5/ same officials who want salaries at par with world best also guaranteed jobs, ten thousand perks,  gleefully tank every Govt scheme by shoddy execution and blatant corruption.

5/ anyone who thinks there is hope for India is living in fool’s paradise. Our real rulers are not politicians but Sahibs who demand and get more power

6/ Sahibs with more powers, zero accountability, and fixed tenures thanks to sustained demand by the middle class. We got our own Frankenstein

So critical question: why great Indian middle class remains extra servile to Babus/Sahibs & full of contempt to politicians? Racism or what?

Demonetization: recession at gate or GDP at 9%

Update 1: 12 Dec 2015 :

1. 34 days have passed since the announcement by PM Modi and as expected almost all of 14 lakh cr is going to be deposited in line with my prediction. India is a jugged country and people always figure out a way to beat system due to our long history of surviving in a hostile system.

2. I still stand by positive contribution to GDP but all assumptions were based on the idea that the situation will normalize in 10-15 days. As of now, it is not looking to normalize even in the next ½ months and hence impact is going to be negative now.

3. Big lesson – Indian middle class – bureaucracy, bank officials etc will boomerang any big reform and hence its high time output focus on reforming them.

++++++

Demonetisation has happened. 500 and 1000 rupee notes are banned. There are serpentine queues outside banks / ATMs and experts are busy. There are high pitched videos, columns, tweets and Facebook posts by every expert about how poor are hurt and how this will kill the trade. Roll back demands are being made from every armchair economist, citizens dining in five-star hotels but extremely concerned about poor, many chief ministers. Overall air of the nation is thick with not only smog but also with pro-poor and small business friendly experts and politicians.

There is a view propelled by a gang of astrologers masquerading as economists that demonetization is going to hit the hard economy as cash will be sucked out of system and trade will stop. This hypothesis does ring true if one notices the plugging sales at e-com ventures, lack of crowd in markets and drop in footfalls at malls. No wonder all Captain Obvious is at top of lungs on the incoming slowdown hitting Indian economy due to this demonetization.

History tells us that events rarely follow an obvious path and are shaped by unforeseen and unpredicted. Demonetization is such an event. It is not going to slow down the economy but going to put this economy in the high pedestal of growth. A jump by 2% to 3% in GDP if not more by demonetization is very much possible and for the first time in the world, we will see trickle up effect in the economy than usual trickle down.

The first foremost and obvious effect of demonetization is the elimination of the cash economy and shift towards banking system. Lot of people even without illegal money were not using banks and were saving in cash at home for a variety of reasons. Now all this money will go informal banking channels and will find its way to formal earning mediums like mutual funds, fixed deposits, savings accounts etc. This will create a push and boom as the cash lying idle at home will be at work and will create a contagion effect. Those dormant Jan dhan accounts will now be kicking with life and in a big way. Even if  10% cash lying idle at the household level, translates into 1.4 lakh crore ( $ 21 billion). Now this $21 billion will be available in the banking system and hence available to Govt/ Industry to kick-start new projects / build infrastructure. To get a relative perspective, FDI inflow in India in FY2015-16 was $40 bn while in FY 2014-15  it was $30 bn so the amount coming from dormant accounts to banking system alone is 53% of this year FDI and almost 70% of FY14-15 FDI.

The second kicker to the economy will come from fall in real estate prices. As per experts and general perception, real estate prices are going to fall by 20% to 30% in general (a black component of a deal). In India, in FY 2015-16, if one just takes top 8 cities, $14 bn worth (90,000 Cr) was invested in the real housing ( 3 lakh houses in 8 cities at a 30 lakh average price though in real numbers are much higher). As per experts, real estate prices are expected to crash by 20% to 25%. This drop in prices even if we take 50% drop in a number of transactions will leave more than 9000 Cr ($1.3 bn) money at the hand of these end users in just 8 cities and this amount will be 10x higher if one account for the whole country. This extra cash available with the consumer will go in other discretionary consumption and will either build the saving rates or drive consumption of services as well as consumable goods.

The third and not so obvious kicker will come from the attempt of all back money hoarders trying to convert it in white. As per data released by RBI, India has 14 lakh Cr ($ 210 bn) in circulation in 500/1000 bank note denominator. For a moment if we assume on a very aggressive basis that 50% of it is white and declared income ( fully tax paid), still there is INR 7 lakh Cr ($105 bn) in black money. Now, these cash hoarders will try to use people with low income to transfer 2.5 lakh into account. Now as per financial ministry data, India has opened 25 Cr (250 million) Jan dhan account for poor people as on today. Now if black money hoarder were able to use 50% of these accounts (12.5 Cr) to deposit cash in Jan dhan bank accounts, one just needs to deposit INR 70,000 in each account. So apparently all this cash will flow back in the system in next 50 days without any collateral damage to these money bags. However, the cost of organizing this deposit program will range anywhere from 20% to 40% ( as per the figures being circulated in media/social media). Even if we take a nominal cost of this transaction at 10% being paid to these Jan dhan accounts(against 30%), it will be a commission of INR 70,000 Cr ($11 bn) ( 10% of 8 lan crore) or 8,000 per Jan dhan account (12.5 Cr). This 8,000 will immediately find its way to consumption as this is massive cash for these account holders and even if just 50% is spent, Indian economy will see pumping of $6 bn (40,000 Cr) being spent in next 3/5 months. This class will binge on clothes, consumer goods and will create a massive multiplier effect. However for the first time multiplier will not trickle down but will trickle up as rural or low-cost goods will drive the industry. So in a way, PM Modi has imposed huge wealth tax on the rich people and accomplished direct cash transfer to poor people.

Foreign investors pumped $10 bn in 20 months in Indian startup which put India on the world map as a top 3rd country for startups and changed the whole mood of the nation while creating many multi-billion enterprises. Payout of $6 bn in arrears to Govt employees in 2008 as per sixth pay commission, triggered a consumption boom in India and insulated it from the economic crisis which impacted every country. Hence this total amount of $40 bn hitting the banking sector/consumption in next 3/6 months is not just going to finish the black economy but going to put India on an autobahn of economic growth.

PM Modi in his usual total out of box thinking, has just put India on growth orbit of a different level where a minimum jump in GDP by 2% to 4% is not ruled out.

Gear up, the age of India has arrived.

Namo Namo

This article appeared at Times of India here.

Diwali Crackers, Pollution and convenient transfer of Guilt

1. Crackers are bad as they cause pollution. The already rotten air of Delhi will be beyond repair if our obsession with bursting crackers continues!

2. While on its own, the idea of not bursting crackers is good but in totality, it is one of the worst ideas to propagate, it lulls everyone to ignore all other major causes of pollution and focus on a non-issue which is bursting of crackers.

3. Delhi air is super bad and reasons are many and cover everyone – from neighbor states, to trucks to some people burning stuff or some festivals and yes population.

4. Interestingly none of us blame ourselves for this mess, our procreation, consumption or a rather excessive over-consumption without a single effort towards rejuvenating nature or reducing consumption.

5. Indian newspapers are running big advertisement campaigns on how to save the world by not bursting crackers while publishing 48 pages newspaper with 3 page of news and 45 pages of hottest Diwali models with or without clothes or some advertisements. Is paper wastage not responsible for forest destruction, useless garbage, and air pollution?

6. Friends talk about pollution by crackers while gorging maggie, drinking cola and finishing snickers for desserts. All neatly packed in plastics and non-biodegradable wrappers which will just lie there in landfills and will create excess garbage!! any guilt no, as they all have already committed to the anti-cracker campaign.

7. Our whole generation can’t even survive a day without air conditioning blowing at 22 degrees and uses car/bike even for local shopping. It burns fossil fuel and consumes electricity without a trace of guilt. And do we feel guilty while switching on AC or driving our car? Probably no as already posted on Facebook about our opposition to crackers!

8. Attending rock shows, guzzling beer, liquor in plastic cups, consuming more plastic, more energy and creating 100x louder decimal noise, do you feel any guilt? arrey baba, already said no to crackers.

9. Continuous use of mobile, laptops, clicking endless selfies, posting endless messages on social media and thus consuming 10x more energy than their unconnected counterparts. Are they feeling the guilt of pollution due to coal burning?? well, they have already said no to crackers, what else do you want!

10. Changing phones to the latest models, religiously upgrading to latest mobile, laptop or another gadget. Are we worried about the toxic waste created by these batteries and silicon toxicity destroying nature? Is there any guilt? well already said no to crackers, what else do you want!! Please don’t irritate further.

11. How many trees have an average citizen planted? Ok, forget trees, how many plants? How many pots? any guilt? well what do you want, I have already said no to crackers

So looks like while we are very committed to saying no to crackers, there is almost zero commitment to save nature or protect the environment. So why such hullabaloo on crackers ?? Because it is easy, it is convenient and there is no loss in advt revenue, no pressure from any lobby group or no paid PR campaigns in newspapers. By not bursting cracker, we feel good about ourselves and at the same time absolve ourselves from the greater crime of polluting earth many times more by our over-consumption.

Saying no to crackers costs nothing, as one looks cool, and can show off without doing an iota of sacrifice. Life goes on without any change in lifestyle,  and businesses continue to pollute without any impact on profitability or top line. Life becomes easy for Courts / Politicians and NGOs as they can show off action without any repercussions for a simple reason that  Cracker industry is small-scale cottage industry with no large PR budget or fancy senior lawyers on the payroll. had Cracker industry being a 10,000 Cr organized industry, same newspaper/ media groups/ politicians/activist would have been arguing in a different tone. Hence banning crackers is the easiest way out as nobody out there to counter the argument.

So before jumping on no to crackers bandwagon, please pause for a moment, plant a sapling or have a decoration plant at home, unsubscribe to that 48 page soft porn junk disguised as newspaper, say no to processed food, plastic packaging, keep AC at 28 degree, drink RO water instead of plastic bottled water, walk/cycle or do carpool and then say no to Crackers!!
It is easy to blame others and difficult to change self! So for a change, this Diwali let us start with self!

Happy Diwali

Sometimes

Sometimes five minutes take a year to fill,
sometimes a year passes by in five minutes,
Some time it happens this way, sometimes another way around!
but life goes on,
dreams go on …
I crack a bit in bytes sometimes
and then again gather me
and move on
Sometimes I fight back
only to realize the lost cause
and when I retreat,
I again believe the cause
the causes and faith, represent one or another
the interest of individual or group,
sometimes individuals win,
sometimes it is a group
but whose win was more important
or was it just a matter of time,
it becomes difficult to say sometimes
and life goes on ..
sometimes it takes ..

written in 1998 at IIML

GST and Economic Boost

GST Bill, despite all claims and hopes, is going to be the biggest damp squib in recent times. It will create chaos, confusion, tax terrorism, and mar the next 2 years of Narendra Modi Govt. Whatever said and done, Indian mandarins are not mentally ready to let the habit of fleecing businesses go, and are least bothered about the cause of businesses or general welfare other than their own benefits. If one is that naive to believe that by just one stroke of law, all Indian officials will become honest and business will function smoothly, then they are living in a fool’s paradise.

GST will increase costs, create a massive nightmare in terms of compliance, and will lead to more heartburn for businesses and the public.

Overall, a disaster in the making!!!

Now only time will tell whether I will have to eat my words or this will be the actual course of the future! Though I will love to be proved wrong in this instance, as our economy can’t really afford any such misadventure.

GST and the end of hope

“Road to hell is paved with good intentions.”

GST – good and service tax, summed as India’s biggest tax reform in the last many years, is finally here. GST empowered committee in one of their last meeting, finalized rates on pending items with Gold getting taxed at a new rate of 3%. The empowered committee other than creating an additional layer of tax also proposed to impose levy/cess etc beyond specified 5 slabs of taxes.

Multiple tax rates, levy, cess, additional taxes!! It seems that somewhere the present Govt just lost the plot and caved into interested parties by enacting the same complicated rules as they were there before GST. Somebody summed up the situation correctly saying that it would have been better to rename the existing taxes as GST rather than going through this administrative nightmare.

If the multiple rates are not enough, Govt has gone ahead and created, even more, confusion by having multiple rates within a single service i.e. look at multiple tax rates at hotel rooms. Zero tax for rooms up to INR 1000, 28% on rooms above 5000 and few more slabs in between. These multiple rates are going to create litigation, an opportunity for corruption and money laundering. For example, a room priced at 999 for two people, get triple occupancy and now move to 10% tax bracket. The customer not willing to pay additional tax will force hotelier to adjust and hotelier, in order to not lose business, will accommodate and end up doing a crime which was not needed.

Adam Smith, the revered economist said that for taxation to be helpful in building nation-state, it needs to have three things in place. First, tax rates shall be reasonable. Second, it shall be easy to pay taxes and the third penalty shall be severe in the case of noncompliance.

If existing tax regime in India was the antithesis to all of three preambles of an efficient tax structure, GST has made it even worse. Multiple tax rates, the filing of tax report every month and on top of it almost draconian powers at the hand of tax officials.

It seems Indian govt is not working to create “ease of business” but is rather trying to ease out small businesses. For example, a trader has a turnover of 30 lakh will come under the ambit of GST and will have to do all compliance including having service of some CA firm which seems reasonable. However, a turnover of 30 lakh will hardly generate a net income of INR 30,000 to 40,000 even at 10% net margin. Can a person earning 30,000 per month, afford all IT infrastructure and have the mental capability of accounting for multiple rates, adjustments, input credits? Can he or she afford the services of a qualified CA to do all paperwork? While life becomes massively complicated for small vendors, it becomes a nightmare who is operating in multiple states. If a company was filing some 15-20 returns a year, it will be now filing 400 returns a year!!

Probably this explains as to why Business papers / Indian Inc, leading consulting firms and Share market are going gaga over such complicated GST regime. GST by virtue of complex compliance regime will wipe out small/informal business in one stroke and will shift all the market to big organized firms while at the same time simplify business/tax rates to a great extent for big businesses. This will boost the income of organized sector, will create more wealth for big players and boost GDP for sure but will also render all small businesses out of circulation. We might see a replay of the present scenario where SENSEX is creating new record every day and India is among the fastest GDP growth nation but there are no jobs!! This push by present complex GST system will create massive unemployment and will open India to global shocks as the informal business will not be there to absorb millions of youths looking for jobs every year.

Hence one wonders what is the intention of Govt behind GST? Off course one aim was always to plug the leakages, collect more taxes (8th Pay Commission is due) but why no attempt or thought to simplify life for small businesses.

Conspiracy theories among us will jump and say that it has been planned by big business to rob the informal sector etc. However, it seems that it is more a case of Hanlon Razor (Never attribute to malice that which is adequately explained by stupidity) than anything else.

Every year Govt leaders/bureaucrats tour developed nations showcasing India and pleading for investments while offering many sops to companies and one wonder why not same sops to SMEs in India? Free industrial land, no inspector raj, freedom from onerous compliance and one window scheme for starting the business?

Rather than simplifying life for small businesses, every move of the Govt is aimed at creating more litigation, collect more taxes while doubting every step of small businesses with zero trusts? Why a democratic govt chosen by popular vote, would like to make life more traumatic for the majority of its citizens (share of the small business / informal economy is far more bigger in India compared to OECD countries)?

The answer does not lie in NDA or UPA but is hidden in India’s history. India which was ruled for almost 1000 year by foreign rulers always had laws which were designed to rule and not to govern.  The rulers (foreigners with no empathy for local population) wanted to collect maximum taxes to fill their coffers ( look at growth in British GDP and decline in Indian GDP from 1800 to 1947 or wealth of Mughals who came on a bare horseback to India). Moreover, the rulers and their agents have a very low view of natives and minimal trust ( all are thieves).  This led to the creation of a governance model which was heavily rule-driven with an idea to plug any possible loophole with maximum power at the hand of the government servant.

Unfortunately post-independence, rather than building a nation for Indians, the new government just continued with the traditions/rules of Britishers (that was worst crime of Pandit Nehru) and maintained the same thought process of the rule rather than governance. This policy ensured that Indian businesses crawl only with the burden of compliance/bureaucracy/inspector raj sitting on its head.

In 2014, the election of Narendra Modi who had no baggage of Western training led to a faint hope that India will finally see freedom from the British rule in theory and practice. The shackles of bureaucracy will be broken and laws will be made with a focus on governance rather than the rule. Unfortunately, rolling out of GST in its present format has shattered all the hopes. If a Right-wing party led by a strong PM almost with Superman image, cannot tackle bureaucracy and can not usher Regan era in India, then no will.

Hence the hope that India will be able to cut its past of 1000 years of slavery, move forward and join the league of big nations has dashed against reality.

GST in a simpler form would have ended the tyranny of tax officials/bureaucracy, unlocked the real potential of Indian business crippled by inspectors raj and would have taken India to another level of prosperity/wealth while creating millions of jobs and boosting consumption.

Sadly, the hope has ended, God Save the King.

Raghuram Rajan Controversy: Why Subramanian Swamy HAS a Point

There is a sense of anger among Indian intellectual class, stunned by the demand made by Dr. Subramanian Swamy for the sacking of Dr. Raghuram Rajan – the most respected, ever charming, hottest RBI Governor India has ever had. From Shobha De to newspaper editors to the average Joe, Dr. Raghuram Rajan commands a following rivaling that of Salman Khan.

Not only analysts, commentators and financial daily editors have come out in support of Dr. Rajan, but the even common public also seems to be completely unanimous in their support of Dr. Rajan and all the good work he has been doing for the Indian economy. Going by the number of editorials/articles and public forum comments posted in support of Dr. Rajan, one can easily conclude that India is in safe hands, or at least perceived by the general public to be in safe hands.

There is no denying the fact that Dr. Raghuram Rajan is one of the finest brains when it comes to Economics. Applauded by some as one of the very few economists to warn about 2008 crisis much ahead of the time, he is widely respected and credited with a sound understanding of complex macroeconomics issues.

The last time a central banker got so much respect and public support was Alan Greenspan in the 2002 era. The other Economist, who got so much respect from Indian public/experts/intellectuals, was Dr. Manmohan Singh as India’s PM in 2004-09 era. Needless to say, public opinion is hardly the right barometer for gauging long-term impact if one goes by the disdain both these gentlemen now attract from academia and the general public alike – as public opinion, fickle at best, is always swayed by perception rather than hard facts.

The arguments made in support of Dr. Rajan are multifold and cover almost every possible ground to demonstrate how Rajan is the best man for the job and how wrong is Subramanian Swamy. The main arguments given by supporters of Dr. Rajan are as follows:

1. Dr. Rajan has been able to keep inflation under control by keeping interest rates high initially and didn’t succumb to political pressure (greatest virtue in the country of Singham). This hard stance towards inflation kept cheap money out and didn’t allow the buildup of another sub-prime scenario in India.

2. He has cracked open the NPA issue of banks and brought out the muck in open. This cleansing of bank balance-sheets will usher in a new era of transparency and will fix the nexus of politician-banker-bureaucrat forever, as the public sector banks are the primary source of crony capitalism and high real estate prices in India.

3. He has published far more papers than Dr. Swamy and is cited / peer-reviewed many times more compared to Dr. Swamy.

4. He is very well respected by International media and considered to be one of the best brains in Economics

5. He is a far better economist than Dr. Subramanian Swamy who is more of a lone ranger/fringe politician.

All the above arguments seem quite valid on the face of it, but then keep in mind that the criticism of Raghuram Rajan is not made by some usual analyst but none other than Dr. Subramanian Swamy – one of the sharpest brains around with an enviable track record of proving his points. So rather than jumping in defense of Raghuram Rajan, it is much better to have a deeper look at the critique, since Dr. Swamy has a reputation of not making false claims without support from necessary data. So rather than debating on issues like nos of papers published, who is the better economist, etc., let us focus on the major issue of interest rates and inflation, which seems to be the bone of contention among fan-boys and Dr. Swamy.

There is no debate that inflation has remained within limits since Dr. Rajan took over RBI in 2013; however, the low inflation has been more of a function of the massive drop in oil prices and commodity prices. Since 2013, oil prices have dropped from the heights of US$ 90 a barrel to US$ 40 a barrel (55% drop). Further, by choosing not to pass this price drop benefit to consumers, Indian govt has been able to manage its high fiscal deficit, which in turn calmed down its currency. Further, Modi Govt has been quite proactive in controlling food inflation by taking quick actions, be it the import of food items or action against hoarders. Hence, to say that inflation in India is down due to strong monetary policy and high-interest rates is nothing but a big myth. In fact, a little bit of movement in oil prices in last quarter has already perked up the inflation.

Hence, it is obvious that the high-interest rate regime has nothing to do with inflation and in fact everything to do with low growth faced by India. Interestingly, everyone has jumped on Subramanian Swamy, harping on the fact of rate cuts not passed by banks to consumers and talking of headline interest rate, while totally forgetting that Swamy is not talking of main interest rate but interest rate available to SME sector.  Interestingly, while interest rates for large corporate hover around 9%, interest rates for SME sector hover in the range of 16% to 22% and no attempt has been made to bring down this rate.

Worldwide, and especially in the Western world, monetary policies are effective tools to manage inflation; however, the economists trained in Western view need to understand that India is not West and does not have the luxury of enormous resources or well-oiled supply chain. Inflation in India is not a function of more demand but supply-side constraints, which become worse with higher interest rates and crony capitalism. So far, not only has RBI failed in bringing down overall lending rates in the general economy, but it has also not worked on main inflation which is plaguing middle class and poor in India.

Unfortunately, all discussions related to inflation in India revolve around food prices, while in actual the bigger share is consumed by the housing sector. On an average, almost 34% of a household income goes towards meeting the housing cost (Rent/EMI), and thanks to liberal policies/crony capitalism indulged by banks (primarily PSU Banks), the prices of housing have remained strong in India and in fact are much higher than even the prices in Dr Rajan’s adopted country. In 2008, when the whole world was reeling under severe liquidity crunch and asset prices collapsed like anything, Indian real estate and Indian economy remained insular and that was not due to sheer brain of Dr. Manmohan Singh but sheer luck in the form of 6th Pay Commission and crony capitalism of PSU banks (banks pumped capital in real estate firms and thus allowed them to keep prices high) that saved the day for Indian economy and builders.

However, this benevolence of Indian banks created other victims – that is overall economic growth in general and middle class in particular. The continued high real estate cost (EMI/Rent) left hardly any surplus cash in the hands of an average consumer and in turn led to continued slowdown in the Indian industry (a fact clearly visible if one goes by almost flat growth of white goods, commercial vehicles, etc.), which was already reeling under high interest costs.

Now one may argue as to what is the relation between housing prices with inflation and interest rates. By keeping interest rates for housing at 11% while the lending rate for SME at 14%, RBI has crowded out money from all sectors and diverted it to housing. Given the power of leverage and faulty income tax laws, investors are earning 30% to 36% returns from real estate and thus creating capital scarcity and higher interest rates. Today, an SME or a hospital or an educational institute pay interest rates in the order of 14%+ while housing loans are disbursed at 11% or lower, and on top of it get significant income tax rebate.

Dr. Rajan, in his 2005 address, had observed that ongoing financial developments had made the world a riskier place (no, he didn’t predict the 2008 crisis as believed popularly) and raised concerns regarding banks’ inability to handle risks beyond a limit due to flawed reward structure. Interestingly, despite deep insight into the workings of the banking system, the RBI Governor in India never restrained banks from providing additional liquidity to real estate or stopped fancy derivative schemes like interest subvention, etc. This continued liquidity given to the housing sector in the form of lower interest rates and subvention schemes has created a massive build-up of risk in the Indian banking system in the form of housing. Strangely, Dr. Rajan didn’t take any action in terms of normalizing exposure to the housing sector.

Hence, Dr. Subramanian Swamy is correct when he says that Dr. Raghuram Rajan has wrecked the economy by wrong policies since continuous 22% interest rate has wrecked SME sector due to high costs and low demand as an average household has hardly any cash surplus left after paying for real estate costs (Rent/EMI).

So rather than saving and steering Indian economy, the policies of present Governor have pushed India in a unique crisis with almost no industrial growth coupled with high-interest rates where there is massive unemployment or no job growth except some small slivers of hope on account of massive funding to startups.

Now with oil slowly limping back to US$ 50 per barrel and above, and 7thPay Commission on the horizon, Indian economy is going to face double whammy for which neither Indian Finance Ministry nor RBI is well prepared.

So why is there such wide support for Dr. Raghuram Rajan and so much disdain for Dr. Swamy? Interestingly, the reasons don’t lie in economics data or hard facts but in human behavior.

We all love Dr. Rajan because he is so much like us and represents our aspirations – be it his education (IIT, IIMA, MIT), his career path (Chicago Professor, IMF, RBI Governor), which we all aspire for us or for our kids to have. Not in the distant past, we all went gaga over a certain another economist who ruled this country for 10 years and despite all hard data/evidence about lack of moral compass and corruption, we kept him revered and on the altar of perfection. So this is basically about us and not at all about Dr. Rajan or Dr. Manmohan Singh.

Now on Dr Swamy – the reason for the disdain and smirks thrown at him by the great middle class is obvious as Dr. Swamy is that super-intelligent lone warrior in the class whom we all secretly admire but have none of the intellect, guts or courage, and hence mock him, because however hard we try, we can’t be him.

But then when was economics about data and not about human behavior!!!