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 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!!!

JNU, Rohtak and Crisis of Democracy

India is in rage these days and seems very united against the threats to its unity. Countless messages related to teaching lessons to anyone who dares to attack or break India are getting posted and shared on social media. Yes – as a Nation, we are ready to crush any voice, which attacks the integrity of India. However, this steel-like resolve faced its first encounter with reality and chose to look away when Haryana violence, not very far from JNU, happened and failed to shake anybody except the people who were at the receiving end.

A section from Jat community decided that they have to be treated as a backward class and chose to convey the message in the form of protest but without the usual ways of shouting slogans or doing a foot-march in the Gandhian way. Jats, who are classified as one of the martial races in India, chose to do the protest in their own style, which is a lot of force and show of strength. And the result was indeed something significant, as around 30 people died, a business worth INR 34,000 Crore was destroyed, and much murkier details of mass rapes, violence and arson started emerging from the shadows as the dust settled down. The impact of this event was 100 times more negative than the Pathankot attack or the JNU anti-India shouting or the 26/11 attacks in terms of massive disturbance to society and the common citizen. However, these powerful events were met by equally deafening silence. Photo-shopped planted messages regarding our motherland stopped appearing. All social site activists, who were proclaiming to tear anyone into small parts in case of a threat to the motherland, started forwarding stale jokes again.

In Organisation Building, one of the most important rules is “Hot Stove” rule given by Douglas McGregor. The hot stove never discriminates on the basis of status, rank or caste, and follows a simple rule – “When you touch the hot stove, you burn your hand.“ An effective organization needs to be like a hot stove, which is to treat every employee on the same terms in order to install a sense of fairness and justice. Any organization, which is not fair to its employees, falls apart over a period of time. Organizations constantly face this dilemma about being fair or being subversive to power groups. Nations being a superset of organizations also go through the same dilemma.

India, touted as world’s largest democracy, really falls apart when it comes to the matter of fairness and providing equal rights to all. There are millions who are languishing in jail without any bail or hearing on the most flimsy of cases while the powerful ones don’t even appear in court, let alone be arrested – be it RK Pachauri or Supreme Court judges accused of molestation. India really follows the principle of animal farm where all are equal and some are more than equal.

This method of selective governance has served India’s ruling elite very well so far. The State rules not only through police and judiciary but also by managing media. However, the recent advances in social sites and crowdsourcing of news are disrupting this power equation. Hence, the sense of fairness becomes more critical and important in these uncertain times.

There is no way one can condone the shouting of anti-India slogans and talk of breaking India at an Indian university and it does deserve suitable punishments, but so are the rioters who raped, killed and looted with no worry about consequences. Unfortunately, not a single political party condemned or raised the issue of Jat violence even when parliament was in session. Vote bank politics or sheer contempt for justice?? While Govt machinery was in full motion in chasing and arresting students, it was holding peace talks with the group of Jat leaders showing total oblivion to the violence, which the same group had inflicted on others in the name of Reservation.

If one sees the chain of events and reflects, it becomes very clear as to why a certain class of citizens of India suddenly feels very alienated and persecuted. Would there still be same silence if this kind of looting/arson/rape and goonda-ism was committed by a section of Muslims? Or by a section that is not large in number and politically insignificant? Will we still be forwarding jokes and ignoring violence while going ballistic over some slogans!!

India is facing its moment of crisis and this crisis didn’t start with PM Modi. It started much before when India started to get ruled by a set of people whose moral compass was shorter than a tiny insect! When Indian judiciary tucked in its comfort zone chose to look sideways and focused more on control of its privileges than dispensing justice! When government executives forgot that they have taken an oath to the nation and not to a political class or ideology, and when the ruler sitting on the chair of governance forgot the need to give equal justice to all. The culmination of all this decay for last 60 odd years has created a situation where a statement like “law will take its own course” is met by bored yawns – by the guilty and the victims alike. Supreme Court’s statement that destroying of public property shall be recovered from hooligans is met skepticism since we don’t even remember as to when was the last time justice was dispensed to common people. Nirbhaya rape? Union carbide? Or when?

The authorities of this country shall be worried that victims of rape in Haryana chose to go silent than come to State for redressal. If the role of State gets reduced when it comes to security and application of the law, the mere existence and validity of State may become questionable in near future? If the State failed to provide security, food, health and sense of justice, the reason for its existence itself becomes very tenuous.

We may dismiss the Haryana incident as one of the random events. However, another random event, i.e. Gujjar agitation, happened just two years back! So a series of such random events shall be taken as a harbinger of a trend rather than a lone star. Hence, we shall see the occurrence of similar events with higher frequency sooner than later, since declining farm income and jobless growth coupled with hyper media connectivity has created a scenario where expectations are high and patience is very low.

While these agitations are worrisome, authorities shall worry more about the nature of these protests, which are going more & more violent and damaging than anything India has seen so far.

Elites / intellectuals in India have generally dismissed the possibility of a Class War in India on the fact that none has happened so far despite so much victimization of backward classes and scheduled castes. However, the reason is very different this time. The upper class in India maintained their supremacy on the lower strata of the society with sustained violence and constant push down ( social discrimination, violence). Barring entry from temples, forcing to sit on ground and probability of heavy violence in case of any rule violation, etc., for last 1000s of years has created a muscle memory in the lower strata of the society which makes then unable to raise a revolt in such a manner. However, the sudden economic shift has changed the game. Poor returns from agriculture and emergence of cities have turned social equation upside down. The earlier upper class is suddenly in the lower strata of society due to changing economic conditions. Given the historical reasons, they are not able to stomach this sudden change in their status. Hence, the revolt by forward class will be more violent and dangerous as there is no muscle memory. Further given the total lack of justice in India legal system, there is a sense of moral hazard where people no longer care about any rule of law or fear any possibility of punishment. This has created a disturbing trend and hence its even more important that a sense of justice is created and guilty are punished irrespective of vote bank, caste or religion.

India is staring at an era, which is going to become more violent, more chaotic if the powers at the helm don’t see the signs and sense of justice and fairness isn’t installed. Rather than these being some rare events, these protests are going to be more of routine! Beginning of so called civil war at a road near you?

Be afraid, be very afraid!

This article was originally published at “Swarajya Magazine” at this link.

Politics of pollution!

Air is thick in Delhi, literally and figuratively. The winter fog laden with smoke, heavy particulates and dust has not left any scope to think otherwise. Newspapers/ social media and activists are filled with smog and rage. Yes, Delhi air is literally thick.

Not to be left behind in such moments of crisis, Arvind Kejriwal Govt, like any other responsive govt, has initiated actions which as usual have muddied the waters more than to clear it and we are in the thick of actions figuratively.

Truth is, Delhi is dying and dying fast. Pollution levels are 6 to 8 times higher than permissible limits. Bowing to public demand and driven by smart statements like “drastic times need drastic measures”, AAP Govt has indeed implemented a drastic rule curiously named “Odd and Even”.

The rule thought and executed in Mohammad Bin Tughlaq style started in usual Delhi babudom style where more vehicles have been exempted than covered under it except the symbolic inclusion of the Chief Minister.  As per estimates, the total no of vehicles expected to be off road (in this case private cars) is less than 10% of total no of vehicles on the road. So far the evidence is indicating the fallacy of such a plan where the traffic has indeed become better but there is no drop in pollution at all.

While the jury is still out on the real cause of pollution to whether it is dust, crop burning smoke, diesel vehicles’ emission or overall smoke emitted by cars, there is a unanimous view among the citizens for the need to reduce usage of personal automobiles and encourage public transport.

Every Govt. all across the world is working on reducing the no. of private vehicles on road. However, it is easier said than done as this needs massive rethinking as well as state intervention in terms of city planning, redesign, capacity building along with attitude shifting, and will easily take 18 months to 5 years in proper execution.

However, in this high pitched debate about “Odd / Even”, experts seem to be forgetting that vehicles caught in traffic jams or moving at snail’s pace cause more pollution than a same number of vehicles moving at optimal speed. When traffic is chaotic and is moving at a slow pace, one ends up using 2nd/3rd gear or apply the more clutch/brake and hence release more smoke/unburnt fuel in the air. E.g., 22nd Dec 2015 was No Car Day which saw hours-long massive traffic snarls all across east Delhi due to non-operation of Vikas Marg and that night was the most polluted night in the history of Delhi.

The present implementation of Odd-Even plan did saw an increase in city speed as a considerable number of vehicles were off-road. However, rather than gloating about success, one needs to introspect about the long-term viability of such a plan. At present due to high fine and very high decibel campaign, a lot of travel has been postponed or adjusted in near term as this plan is only for 15 days. Further, this plan has not eliminated demand or made carpooling very popular. Hence in long-term, the demand will come back to a natural meaning same number of vehicles will come back to the road.

While the speed of the city can be impacted by reducing the number of vehicles on road, it can be increased in a more sustainable manner by regulating the speed of the slowest vehicle on the road. And slowest vehicle on road is the politicians’ favorite “Auto Rickshaw” (max 55 kmph) or Goods Carrier (average speed 25 kmph). Dr. Eliyahu M. Goldratt in his seminal book “The Goal” demonstrated that the speed of any system is determined by its slowest moving part.

Hence, Delhi moves at the speed of 30 kmph not because of excessive vehicles on the road but because of the speed of auto-rickshaws or goods carriers, which move at speed of 30/35 kmph. Every day one encounters a fully-loaded Bajaj auto struggling to climb a fly-over at a speed of 25 kmph and a long serpentine queue behind it struggling to get to adjoining lane and thus slowing whole traffic.

So the pollution level can be dropped drastically if the speed of Delhi can be increased by 25/30 kmph as it will eliminate all road jams as well as slow speed. So what’s the solution? Ban auto-rickshaw with a bureaucracy mentality and earn the ire of the middle class as well as erode massive vote bank of auto drivers? Yes, actually!

This solution is quite simple if one moves away from the politics of it. The only thing Govt needs to do is to replace slow moving auto-rickshaw with a car. Cars are safer, faster and are all-weather vehicles unlike an auto. Further, cost of an auto is around INR 2 lakh and with permit / convenience fee, etc., auto-rickshaw cost on the road is around 5 lakh. In comparison, Tata Nano CNG car costs close to 2.5 lakh. So rather than issuing new auto permits, Govt shall launch a massive auto upgrade program which with proper structuring / debt plan can enable all auto-owners to shift to Tata Nano. With a total population of 1 lakh auto rickshaws, the whole program can be done at a cost of less than INR 250 Cr one time cost (Complete makeover cost is 2500 Cr).

Such upgrade will save 10x more in terms of savings in fuel costs / health care and will result in much cleaner air, and on top of that get massive votes from auto owners. However, such a move needs political will and desire to solve issues at the core. Unfortunately, pollution in Delhi is more about politics and a game of one-upmanship where all authorities involved in the affair are looking for scapegoats and opportunities to shame the opponent rather than actually saving the lungs of its citizens. So whether it is pollution or governance, the victim is always the Great Indian Citizen. Ever optimistic, forever cheated!

Theory of Asset Bubbles: Its all about Color of Money! – Part III

Fidelity has marked down value of its investment in snapchat by 25% and there are some other markdowns reported by investors as part of annual/quarterly accounting procedure and it has sent a wave of glee all across globe among all startup watchers/experts and commentators as markdown by Fidelity is sure sign confirmation about the bursting of private tech bubble and like 2001, we will soon be witnessing dead unicorns all around us. However, nothing can be farther than the truth.

The one thing the experts are missing while thinking of 2001, is the fundamental shift happening in the world economy due to mobile/tech and automation which is similar to the social transformation as it happened during the industrial revolution. The impact of the present wave of innovation will be far more severe, permanent and disruptive on society. The change is real and is happening, though a lot of arguments (Luddites, Software taking over jobs) have remained same as they were during the industrial revolution. Unfortunately, we all are looking at this new paradigm through our old colored glasses of Industrial revolution and using the same metrics to measure new dimensions. Hence Fidelity writing down the value of SnapChat only means that Industrial revolution accounting rules are not in sync with Machine age accounting!!

However, the single reason why this startup bubble won’t burst despite questionable business models of many players is nothing related with massive machine revolution, or new business paradigm but a simple technical matter that is “Color of money” or simply put “type of capital” being invested in these startups. In 2001 dot-com bubble, that continues to overshadow all the advances made by internet business, almost 90% of the companies were listed and were funded by public money while in 2015 the numbers have just reversed as almost 90% of the companies are funded by private capital or the alternative investment pool. This private capital coming from alternative investment pools seems quite high but still is a tiny fraction if one considers the overall investment capital pool.

In recent times, AUM with alternative investment pools has been growing at a healthy pace, however, it still constitutes less than 25% of all asset class. Further this 25% constitutes Real Estate, Hedge Funds, Buy-out funds, Energy & Commodity funds, Private equity (Venture capital is a tiny subset of Private equity), and hence money invested in tech companies (through venture capital and some hedge funds) is tiny compared to overall investment pools. ( to give some perspective, Venture funds in US invested close to $48 billion in 2014, and all over the world the total capital deployed in a year is less than $60 billion while in 2008, the money allocated by USA Govt for bailout of banks was $700 billion ( actual amount came to $460 bn). Hence liquidity is not going to dry up very soon, as money flowing in the venture / new tech space is still very marginal and even few losses here or there won’t shift the needle.

The second big reason or rather main reason due to which probability of a bubble burst is negligible is that on account of investments by VC/PE industry, these companies are remaining private without any need to access public markets and as of now there is enough capital waiting on the sidelines to keep these companies private for foreseeable time.

So how is this private capital is impacting the bubble burst? A bubble burst in any economy is defined when there is a sharp contraction in the value of an asset and when this contraction is happening all across the sector with the majority of assets. This sharp contraction in value is generally driven by liquidity crisis as survival of a business generally is not a function of business model but rather that of liquidity in the system (some may argue that liquidity is a function of business model but that is not always the case).

Now, this liquidity crisis is created either by debt call or a sudden crisis in the environment which creates panic and overall negative sentiments and thus end up choking money supply to a company.

A liquidity crisis can hit any company, however, a privately held company is in a much better position than a public listed company in handling it. Since listed companies are under intense public glare, quarterly earnings and disclosure norms sometimes perpetuate a liquidity crisis as any miss in revenue/profitability estimates or cancellation of a large contract create a run on the stock and in turn leads to a crisis with an already struggling business. Disclosure norms/insider trading rules create inherent disadvantage to a public listed company in the following manner a) Other than management, nobody has access to financial performance and hence a bad quarterly result can create massive shock/panic due to sudden drop in stock value b) As almost all data, especially negative ones are in the public domain, management has not much room to maneuver/ hard bargain with investors and  c) short sellers /option traders perpetuates the crisis by short selling thus creating a further run on the company stock. All these actions lead to a sharp drop in share prices which in turn create a panic among all stakeholders i.e suppliers, creditors, clients, customers employees, and investors.

These kinds of shocks further put pressure on other companies in the same sector and many times lead to a contagion effect if that sector is facing strong headwinds and may result in re-rating of sector thus leading to the massive drop in asset value. These actions lead to chaos as mob mentality takes over the rationality and completely chokes the money supply resulting in an unwarranted fire sale or financial crisis.

In comparison to public listed companies, a privately held company is generally protected from all the trauma caused by the pressure of quarterly earnings, disclosure norms and public glare. All this restricted public info is given an inherent advantage to unlisted companies when it comes to negotiations for the capital, terms as well as in managing information flow etc. Moreover, as  the investors are much aware of the direction and performance of companies and are generally in knowledge of the crisis in advance, they are able to work out solutions while closely working with management be it fundraising, M&A or right pricing the company stock as we saw it happening with startups like Myntra, LetsBuy, TaxiforSure etc

Hence the possibility of a large-scale panic where the majority of startups will go bust is remote for the reasons mentioned above as investors/founders will continue to negotiate and create liquidity situations in case of strong headwinds without external panic. They will also be helped by the fact that the amount of capital deployed & the value of business is not more than 25% (Uber valued at $50bn+ has raised  $ 8.2 billion (16%), Flipkart valued at $15 bn has raised $ 3.15bn (21%)) and emboldened by LP clause, more and more hedge funds are waiting at sidelines to enter these markets.

However, it does not mean that no company will go down under as the private markets work in a discrete manner showing bursts of activity, then freeze and then again hectic activity. The evidence of this can be seen from the investment pattern as seen in Indian e-commerce market where after showing initial euphoria in 2011/12, funding market just froze for e-commerce in 2013 and then again became super active in the latter part of 2014. Hence rather than bubble burst, we will continue to see these cyclical investment patterns and any company with not enough cash to survive these short bouts of nuclear winter will go down irrespective of business model, insane consumer happiness, superior unit economics or growth as we have seen with and host of other businesses. If there would have been a bubble, all of the companies would have been able to raise money at their terms but we are yet to see evidence of this.

It will be good for experts to remember that an asset bubble is more a function of the nature of capital deployed rather than that of business logic.

This behavior probably explains why Indian real estate bubble never burst so far and in fact will never burst despite noises being made about this burst since 2006. In India, debt by PSU banks is almost like quasi-equity which is permanently structured and can never be recovered due to over friendly regime of bureaucrats, policymakers, politicians and Indian courts (lender to Kingfisher can very well attest to that). As the debt is never called, it does not create liquidity pressure and all we witness is cyclical movements market (hectic activity and total freeze) while maintaining the asset prices at the same level.

Hence contrary to common perception, no bubble is going to burst but a Darwinian world will continue to evolve in the true sense given the nature of capital as well as of the market. For experts, keep writing and voicing opinions; after all, what is life without talk and gossip, only a few vices allowed without any medical warning.

The Other two parts of this articles are at this link

Part 1: Anatomy of coming Startup bubble: The missing argument – Part I

Part 2: Startup Bubble: Case of misplaced Schadenfreude – Part II

Startup Bubble: Case of misplaced Schadenfreude – Part II

The great Startup bubble has burst finally or so the Experts would like us to believe as the evidence (as per them) is mounting day by day. Around 1500+ employees at various startups in India have been laid off. One of the Founders was held hostage in Pune and the worst of all, the biggest proof, a certain CEO had to send a strong email to his sales team on missing their quarterly sales target. No, it’s not any ordinary sales target, it was QUARTERLY SALES TARGET. Generally, in other sectors, companies fold up when they miss their targets, but damn this VC money, such non-performers are still in business despite missing their top-line goal.

So missing sales targets, 1500 jobs lost and angry employees laying a siege of the CEO!!!  What more proof do these moron VCs need, wonder our expert commentator(s) / analyst(s).  Interestingly, all these armchair experts, with all their analysis, comments and advice are nowhere involved with startups/VC world in any manner, (barring few angel investors) but nonetheless have great insight/perspective on everything startup, be it business models, path to profitability, unit economics or any other thing under the sun except probably as what makes these dumb VCs from la la land to give millions of dollars to these kid entrepreneurs who are still learning ABCD of business. ( signs of time, our experts will tell you).

The bubble discussion is no longer a matter of perspective but has now acquired the shape of definitive reality, where judgment has already been delivered. Now everybody in the crowd is just waiting with bated breath for big bang slaying of the unicorn, while the experts like seasoned matadors are taking their time and using data to bring the Unicorns down, with noises getting louder and louder with chants of “End is nigh” filling the air.

So is the bubble really bursting or are we all over analyzing things? An email or for that matter any communication by a CEO to his sales team about missing quarterly or annual sales target is not a bubble. It is a routine dressing down or pumping up of teams as any sales director or CEO will tell you and missing of sales targets or decline in numbers, don’t bring doom as GAIL or NIIT CEOs can attest (GAIL profit dropped by 66% in second quarter this year and NIIT has also seen some swings in its quarterly numbers in last 15 years, and no bubble has burst yet). Same way losing 1500 jobs is sad but a routine affair and is almost like a tiny drop in a big country like India where one startup is starting every day and some 600 startups have raised capital in the last 18 months.

Hence these incidents are not a sign of the bubble but signs of the next phase in the life of these startups as they meet the reality of the business world and enter an adolescent phase of life. Some will flourish, some may die and some will just hang around but that is a usual Darwinian world about survival of fittest, not a bubble burst!!

The Other two parts of this articles are at this link

Part 1: Anatomy of coming Startup bubble: The missing argument – Part I

Part 3: Theory of Asset Bubbles: Its all about Colour of Money! – Part III