A Complex Nation

India is a convolution of conundrums. There are millions of problems, billions of solutions and yet none of them is workable. It permeates from the very name itself- a sectarian name but a secular policy, a democracy yet dynasty-driven since decades, full of patriotism but manifests itself only on 15^th August & 26^th January, unbelievable population but eccentric demographic dividend, a pool of natural resources but insufficient crude oil, great coastline yet highly insufficient ports, excellent credit line but exiting investors, formidable army but unable to protect their own soldiers, a sovereign union yet with states having special constitutional status, impeccable talent but all drained to advanced economies, neither capitalist nor socialist, great heritage but patented by westerns, envious lineage but none remembers, more than 500 senators but not more than 50 well-educated, a Bengali-English speaking president on ‘Rashtriya Hindi Divas’, an Italian lady controlling the government, her retarded son embarrassing the government and their mute robot with high IQ, no spine and abominable fashion sense. It’s been 66 years to the freedom, but the list of great patriots still includes only those names who died to free their motherland.  A complex nation indeed!

We are really a mystery that is mysterious than Steven Spielberg’s ensnares in Indiana Jones movies. The only fact about our democracy that can still be boasted about relentlessly is the extremely powerful constitution. Thanks to the acumen and jingoism of our highest judiciary, our fates are still in the hands of a blind weighing lady who isn’t yet deaf to our concerns. Apart from that, every other pillar of this vehemently overwhelmed democracy has fallen apart in the course of time. A nation that went close to fascism and autocracy during the days of Indira Gandhi came out of it somehow with feeble yet unbeaten support of Supreme Court that upheld that Indian constitution could not be changed fundamentally through any parliamentary amendments or ordinances. So, this recent shameless act by UPA led parliamentary ordinance to overrule SC verdict on disqualification of convicted politicians is destined to die its natural death. Thank god Rahul Gandhi publicly renounced it and brought Congress out of a great ignominy, otherwise it was very tough call for the president. Had he refused to sign, he would have attracted the wrath of the Italian lady upon whose instructions this let’s-not-break-UPA decision was taken. Had he returned it back to parliament for review, in all probability, it would have been sent back to him unaltered to which he can’t refuse to sign now. Then it would have been as good as constitutional amendment, which would have given succor to Lalu Prasad Yadav as he could contest election even if he is convicted in the imminent court decision. Of course that would not have been an end of it. Constitutional experts like Fali Nariman and AAP proponent Prashant Bhushan would have filed a PIL in SC challenging this amendment as fundamentally unconstitutional. Undoubtedly SC would have upheld this view and would have overturned this amendment in due course of time, but meanwhile Lalu Yadav would have contested the elections already laughing at the blind weighing lady. No doubt Congress could not explain why there was an urgency to take a route of an ordinance and that’s how one more blame comes upon the so-called ‘indecisive’ leadership of Manmohan Singh. He too habitually takes it and proves his never questioned loyalty!

At the other side, opposing party isn’t strong enough to claim majority despite bringing their hero at the helm now. With no party expecting majority, a vulnerable alliance creeps again into the already shattered political instability. With too many regional parties with core agenda of local politics, no alliance will take this country further. It is saddening to read every day that FIIs have now started expressing their disgrace about Indian polity publicly and they are now demanding for bilateral treaties for each and every business they want to do in this country. There can be no more testimony than this about how other economies look at the otherwise powerful constitutional fabric of India. They have no trust in our laws and legal framework. You have a law to bank upon, which gets retrospectively amended to overturn a landmark SC verdict. You wish to bring in foreign money and there are loads of FDI regulations. We don’t open up our Insurance & Pension sector to much of foreign investments and instead are offering them to invest in building Indian infrastructure. Why will a profit-centric foreign entity invest in building up Indian infrastructure? Is it their job or ours? Our 2012-2017 five year plan aims at raising capital expenditure on infrastructure to grow to 9-10% of GDP in five years from current 2-3% and govt. has committed for less than half of this gap. They expect rest of the money will come from private equity and foreign investment. How can this happen? Indians are so conservative that they don’t even participate in securities market aggressively. While that’s a virtue that saved us during post-Lehman global recession, it is also an impediment to far outreaching ambitions of Indian govt. With no substantial exports, the ever widening Current Account Deficit is now around 5% of GDP, almost double of its sustainable limit. Despite having so many manufacturing hubs, SEZs, tax subsidies and public-private partnership modeled industrial units, we can’t export anything impressive than spices and agro-commodities. We are not even a leader in that, Bangladesh surpasses us easily in agro-exports. Most of our energy and brain is spent in doing scams. Yesterday, I was doing just an amateur arithmetic casually which later awestruck me. Approx. size of Indian economy is USD 1.8 trillion (roughly Rs. 100 lakh crore). Our fiscal deficit is around Rs. 4.8 lakh crore, which is around 4.8% of GDP. Now, let me just sum up very few of the recent scams that led to huge losses to public exchequer. Coalgate (Rs. 1.86 lakh Cr) + 2G (Rs. 1.76 lakh Cr) + CWG (Rs. 70,000 Cr) + Karnataka Waqf Board Land Scam (Rs. 2 lakh Cr) + UP NRHM & food grain scam (Rs. 45,000 Cr)…oh, this is enough…they add up to Rs. 6.77 lakh Cr. This means, had we not lost this money in scams, we would be running fiscal surplus of Rs. 2 lakh Crore. Mind it, I have considered only 5 scams here, actually there are 500. Who says India is a poor country? On top of that, who says that we will become a superpower one day?

As if this all mess was not enough, our economy has also started dancing randomly. Rupee has returned from abyss and has shown its true potential. 9.5% growth rate in 2010-11 has tumbled to 4.5% in just 3 years with no silver lining to the cloud in sight. Inflation has been tamed down from 11% to 8% somehow, but still it’s incapable of saving fixed deposits from giving negative returns. I watched on Youtube our Ex-governor D Subbarao speaking at London School of Economic in April-13. He says that if crude oil & gold disappears from Indian import list, 5% current account deficit (CAD) will become 4% current account surplus. While it would have been ok to spend our dollar kitty on productive imports such as knocked-down kits of automobiles or chipsets of mainframe servers, much of the foreign exchange reserve is being expended on our insatiable lust for gold. Why do we have to have so much of gold? It’s not even being pledged in the market against which some liquidity can be generated in otherwise cash-starving market. It’s lying absolutely idle in bank lockers and jewelry boxes. It’s like buying a Ferrari and keeping it parked in garage. With most of the crude oil coming from imports and Indian agriculture continuing to depend on monsoon even after six decades of independence, food inflation is always high with tears rolling down even by looking at onions. Rural wage levels have gone up which gives ample money to people to spend on necessary commodities. With supply side shocks and demand pressures never receding, our inflation level is not likely to come down further. On top of that, no growth is there which usually accompanies deficits. We are a classic epitome of the definition of ‘stagflation’.

For instance, let’s say that gold demand can’t be curbed as a woman’s mind is impossible to understand, but what about crude oil demand? Govt. isn’t linking it to market price and that’s why its demand never moderates. Why aren’t we incentivizing electric cars? My company has gone even further. They give managers like us ‘petrol allowance’ as a compensation of fuel expense. Diesel & CNG not claimable! So, already well earning people are encouraged to consume more petrol by giving additional allowances. Who is paying for this? Govt. spends Rs. 30,000 Crore on crude oil subsidy every year. Two days ago, I read in Business Standard that govt. is likely to increase it to Rs. 40,000 Crore due to higher costs incurred on account of depreciated rupee. This will push our deficit beyond 5% of GDP and this deficit has to be paid from taxpayers’ money. It is a shocking fact that my company is one of the hundreds which give petrol allowances to their employees. It is pointless to ask why they can’t simply give their employees money to purchase electric cars and ask them to share one car in 2-3 persons instead of encouraging them to consume more petrol. This is a Cap-ex which will break-even in 2-3 years at max, but none will listen to me as govt. sells petrol at cheap rates. How will the demand come down and how will our CAD improve?

Industry lobbyists spared nothing while blaming RBI for depreciating Rupee, trying to pressurize RBI to loosen up the monetary policy by decreasing interest rates. But RBI governor isn’t their agent. He acts in public good, not for private gains. Also, with only one instrument at their hands- interest rate, how much can RBI do? They have a monster of inflation in front of them to fight, which has got far outgrowing impacts on common man than falling Indian rupee. RBI is doing its best to control inflation, but until & unless their resolves are ably backed by commensurate govt. policies, their efforts are haphazard. People cry that Rupee devalued by 26% from 54 to 68 in just two months, but does anyone ponder if it really deserved to be at 54? What was so special before two months that Rupee deserved to be at 54? Nothing has changed except tumbling currency. Does it not raise basic doubts upon the earlier intrinsic value of Rupee itself? There are many arguments that Rupee was already overpriced below 60 since long and this freefall was certain to happen. In fact, I believe that true value of Rupee was always above 60 only and it remained below 55 somehow thanks to RBI’s constant interventions. Currency is a commodity and when you have adopted a capitalistic pricing model, let the market discover its true value. I have even read articles titled as ‘murder of rupee’, which left me wondering why the author doesn’t understand that falling rupee is actually a fantastic export booster. Why do we take this fall of rupee so emotionally? A weaker currency does not immediately suggest that your country is losing shine. Today, 1 Japanese Yen equals to 0.64 Indian Rupees. Does it mean that we are better than Japan? China has been incurring systemic efforts since last many decades to keep their currency devaluated so that their exporters are benefitted and their country can pile up a huge kitty of foreign exchange at the same time. If estimates are to be believed (I say this because statistics about China can never be trusted upon completely), China has more US dollars today than even USA does. And China does this all despite being a communist economy. We are far better placed than China to have achieved economic dominance ahead of them. But it isn’t going to work, as everything in our case boils down to the ultimate hard-hitting fact- vote bank.

We are not China and we will never be. I just don’t know when we will ever be India again.

The Murder of Growth- Part 2

In my last blog which is a prequel to this one, I wrote about how Mr. Nehru and his socialist principles led the economy of this nation to a fully blow debacle. I received various feedbacks on the same, mostly converging to the argument that my dissertation was mainly theoretical and not political. People are right if they expected me to address political issues too when I talked about the failure of a federal government. Some also argued that 1962 war with China and our miserable defeat in the same gave a major blow not only to this country’s economy but also to its self esteem. I agree that China war was a disaster, but its seeds were grown over a decade before it actually happened, most important of them being 1959 Tibetan uprising which Nehru govt supported and issues over Himalayan borders near Sikkim which was not a part of India then. (Sikkim was under the suzerainty of India, which controlled its external affairs, defense, diplomacy and communications, but Sikkim otherwise retained administrative autonomy. It became an Indian state only in 1975.) While Indo-Chinese war per se could a subject of another blog, it certainly isn’t the excuse with which Nehruvian government could vindicate itself. Our economy could have been saved despite the war, but it wasn’t. The point here is that I did not focus on politics in my earlier blog as Nehru never experienced any vote deficit. He was at the helm of Congress party which literally ruled the country unequivocally at his times, thanks to people’s belief that Congress got this country free from British rule. No political crisis occurred in his era and so, it can be said that all policies he advocated were free from any political pressures or majority-deficit encumbrances. The political crisis came in his daughter’s era and hence, this blog is completely political !!

While I can’t say that I am against Indira Gandhi (IG), I must purport that blunders in economic policies continued in her era too. By the time she became PM in 1966 following death of Lal Bahadur Shastri (LBS), Congress was already split in two factions, the socialists led by IG and the conservatives led by Morarji Desai. The internal problems showed immediately in the 1967 election, where Congress lost nearly 60 seats winning 297 seats in the 545-seat Lok Sabha. IG had to accommodate Desai as Deputy Prime Minister and Minister of Finance. In 1969, after many disagreements with Desai, the Indian National Congress finally split. She ruled with support from Socialist and Communist Parties for the next two years. The fundamentally socialist upbringing by her father and her complete political dependency on leftists at the very beginning of her political career made its due impact on her mind and our country started racing, not walking, towards becoming a soviet clone.

The results started showing almost immediately. Her government issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalized the 14 largest commercial banks in the country with effect from the midnight of 19 July 1969. These banks contained 85% of bank deposits in the country. Jayaprakash Narayan described this step as a "masterstroke of political sagacity”. I am currently reading one Nani Palkhiwala’s book called ‘We, The Nation’ where he argues that ordinances are to be used only as an exceptional last resorts when the legislative assembly couldn’t function properly. However, IG used these ordinances as her routine lawmaking tactic, challenging the Indian constitution itself. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With this second dose, the government controlled around 91% of the banking business of India. Can you imagine? 91% of the nation’s economy being controlled by a single person!

The period of 1967–75 was characterized by socialist ascendency in India which culminated in 1976 with the official declaration of state socialism. IG not only abandoned the short lived liberalization program started by LBS but also aggressively expanded the public sector with new licensing requirements and other restrictions for industry. She re-launched the Five-Year plans in 1969, which were stalled by LBS to start damage control by focusing on annual plans with micro-planning. Having been re-elected in 1971, Gandhi proceeded to nationalize the coal, steel, copper, refining, cotton textiles, and insurance industries. During the 1971 war against Pakistan, foreign owned private oil companies had refused to supply fuel to the Indian Navy and Indian Air Force. In response, IG nationalized oil companies too in 1973. After nationalization, the oil majors such as the IOCL, HPCL and BPCL had to keep a minimum stock level of oil, to be supplied to the military when needed. Gandhi claimed that only "clear vision, iron will and the strictest discipline" can remove poverty. If at all there is someone who still doesn’t see this as socialist, let me tell him that she also signed the Indo–Soviet Treaty with Soviet Union in August 1971, which was in stark deviation from India's previous position of Non-alignment in the Cold War.

On 12 June 1975, the High Court of Allahabad declared IG’s election to the Lok Sabha void on grounds of electoral malpractice, since it was held that she misappropriated government funds for her election expenses and campaigning. The court thus ordered her to be removed from her seat in Parliament and banned her from running in elections for six years. Since a PM has to be a member of either Lok Sabha or Rajya Sabha, this decision effectively removed her from PMO. She refused to resign and expressed her willingness to challenge HC order in Supreme Court. Nationwide protest movements started following her autocratic leadership. IG govt recommended then President Fakhruddin Ali Ahmed to declare a state of emergency, which he immediately declared on 26 June 1975. What an obedience! Within a few months, President's Rule was imposed on the two opposition party ruled states of Gujarat and Tamil Nadu too, thereby bringing the entire country under her direct control. Now she could do anything!

Police were granted powers to impose curfews and indefinitely detain citizens. All publications were subjected to substantial censorship by government. Impending legislative assembly elections were indefinitely postponed, with all opposition-controlled state governments being removed by virtue of the constitutional provision allowing for a dismissal of a state government on recommendation of the state's governor. President Ahmed also issued ordinances that did not require debate in the Parliament, allowing IG to rule by decree. Rule by decree allows the ruler to arbitrarily create law, without approval by a legislative assembly. So, it’s not new for this country that the President is henpecked by the head of Congress party. As if this analogy is not good enough for someone to know whom I am talking about, let me give one more similar analogy. IG openly favored her son Sanjay, who had no qualifications or credentials to satisfy the needs of the offices he headed. In 1971, when IG govt proposed the production of a "People's car"—an efficient indigenous automobile that middle-class Indians could afford, Sanjay was awarded the contract and the exclusive production license though he had no experience, design proposals or tie-ins with any corporation. I wonder how many know that ‘Maruti’ company was Sanjay’s foundation. Even while he had not been elected and held no office, Sanjay used to exercise his influence with cabinet ministers, high-level government officers and police officers. In one famous example, I. K.  Gujral resigned from the Ministry of I&B when Sanjay attempted to direct the affairs of his ministry and give him orders. He was promptly replaced by V. C. Shukla who was Sanjay’s confidant. In another incident, after popular Bollywood singer Kishore Kumar refused to attend a function of the Indian Youth Congress, his songs were banned on All India Radio upon Sanjay's insistence. Look who’s ruling the country!

IG, being the ultimate ruler, shackled Indian economy further by undertaking a massive redistribution program. The provisions included rapid enforcement of land ceilings, housing for landless laborers, the abolition of bonded labor and a moratorium on the debts of the poor. Lenin did the same in Bolshevik Russia. Stalin did the same in Soviet Russia.

In 1977 elections that followed emergency, Congress party was crushed totally. Indira and Sanjay Gandhi both lost their seats, and Congress was cut down to 153 seats (compared with 350 in the previous Lok Sabha), 92 of which were in the south. Janata Dal claimed victory and came to power. But a seasoned politician by now, IG knew her way out. When the new govt ordered for her arrest on the charge of planning a conspiracy of killing their leaders in jail during emergency, she gave so melodramatic speeches that people almost forgot that this was the same lady which once ruled them mercilessly. She knew very well that Janata Dal govt was multi-aided and could tumble at any time giving her a chance to reclaim what she had lost. Her arrest and long-running trial gained her great sympathy from many people. Soon, the differences amongst the leaders of new govt surfaced and Desai resigned in June 1979 as PM after Charan Singh and Raj Narain formed their own breakaway party. Charan Singh was appointed Prime Minister, by President Reddy, after IG promised him that Congress would support his government from outside. Just after a short interval, Congress withdrew support and President Reddy dissolved Parliament in the winter of 1979. Before the 1980 elections, IG approached the then Shahi Imam of Jama Masjid and entered into an agreement with him on the basis of 10-point programme to secure the support of the Muslim votes. In the elections held in January, Congress was returned to power with a landslide majority. Shrewd, isn’t she?

Her audacity went on increasing after this victory and she even challenged the global leaders as well. I remember reading in a biographical piece on Richard Nixon (US president 1969-74) that he used to call her “witch”. During 1971 Bangla-war when US openly supported Pakistan and mobilized their seventh fleet of navy (incl. USS Enterprise, the longest naval vessel in the world) to Indian ocean, Indian bureaucracy started shaking legs and Indian media started advocating govt to begin talks with US, but IG wasn’t moved a bit. She flew to Russia, talked to Brezhnev, Russian Premier, and declared from Moscow radio only that India was not afraid of US navy and was ready to fight. Within 2 days, Russian navy came to Indian seas armed with nuclear missiles and US immediately retreated. Nixon later wrote- “this woman suckered us”! With the same impudence, she went ahead with Operation Blue Star which finally turned back on her and she was assassinated by her sikh bodyguards in 1984.  Her politically ambitious son Sanjay had already died in a plane crash in 1980 and his younger brother Rajiv, a passive guy who otherwise would have pursued his aviation career as a pilot, came to power. India got its youngest and best looking prime minister ever!

Rajiv did try to liberalize the economy and commenced reducing the restrictions of license raj. He also brought onboard Sam Pitroda and paved the way of Indian telecommunication revolution, which was an amazing achievement and he deserves full credit for that. But, after reading Rajiv’s biography, I am of the opinion that he was still naïve to understand economy and instead tried to become larger than life character. He was a professional pilot and his ambitions too weren’t any lesser than horizon. Instead of totally focusing on what he had started rightly, he again resorted to traditional five-year plans, delegated the administrative functions to his confidants and himself plunged into world politics. Sri Lanka was his special attraction!

This small island was extremely delirious for both US and USSR, due to its strategically important geographical location in Indian ocean. Rajiv initially succumbed to political pressure from his south Indian alleys and supported LTTE and set up camps in India to militarily train the LTTE extremists to make them able to fight with Lankan army. He was of course persuaded by Russia for the same, as Sri Lanka could have been a good military base for Russia as an answer to US owned island Diago Garcia in Indian ocean, where US had placed their nuclear missiles having capacity to hit any major city in Asia. For this favor, Rajiv received regularly huge moneys from Russia and KGB. After his death, in 1992, two Indian newspapers, Times of India and The Hindu, had published reports alleging that Rajiv Gandhi had received funds from the KGB. The Russian government confirmed this disclosure and defended the payments as necessary for the Soviet ideological interest.

However, soon Rajiv understood that things had started slipping out of his hands, as LTTE became too powerful and went out of his control. Western countries including UK and US started directly providing arms and ammunitions to LTTE to turn it against India. Rajiv tried to regain supremacy by military action on LTTE rebels. Indian army intervened with full force in 1988 Maldives military coup and helped Maldives army to gain control over LTTE sponsored fundamentalists. Also, Rajiv deployed Indian Peace Keeping Force (IPKF) to Sri Lanka to restore order and signed a pact with Lankan govt, ordering militants to surrender weapons and come for a political dialogue. RAW had completely underestimated LTTE’s power, which later killed Rajiv in 1991 during his election campaign in Tamil Nadu. I was shocked to learn that his killers had taken their military training in RAW’s Nainital camp during the time India supported LTTE.

Following Rajiv’s death, India got its most economically prudent prime minister - P V Narsinha Rao. As per me, he is the best Prime Minister of India (in terms of his contribution to national economy) till date and I would rank him even above A B Vajpayee. It’s his misfortune that Babri Masjid demolition happened during his tenure and Congress made him sacrificial lamb to save party’s face, otherwise he would have been given due credit for 1991 economic reforms that transformed the socialist economy of this country into a meaningful, competitive and efficient economy. Some coin this paradigm shift as capitalistic, but I would say it was a controlled liberalization, just the way it was necessary at that time. He was the man who literally carried Congress on his shoulders for 5 years after Rajiv’s death. But Congress is such a mean organization that it did not even allow Rao’s body to be taken inside AICC building, after his death in 2004.

1991 happened, Manmohan Singh took the credit, our economy survived and this nation was saved from the ignominy of bankruptcy.

…and we are back to 1991 again today !!

The Murder Of Growth- Part 1

This is an intensely economic blog and represents my personal views based on some amateur reading out of academic interest. It’s not a ‘copy-paste’ at all, but it is ‘find-note-arrange-rearrange’ at places. It goes against Jawaharlal Nehru mostly and is based on analytical facts, not on perceptional hindsight. Basically it's about Nehruvian Socialism that failed to uplift the most diverse democracy as the way it was purported to do. My expressions could be fundamentalist, but thoughts aren't so necessarily.

With the recent backdrop of tumbling Rupee against American and European currencies, most of the economic portals paid remembrance to FY 1991 when India was on the verge of default on the BoP commitments and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.  Yet, the stark difference in both situations is that Rupee was pegged to the value of a basket of currencies in 1991 and wasn’t freely tradable, whereas in 2013 this isn’t the case and our economy is now much more liberal to allow externalities have their due impact on currency pricing. While reading about 1991 crisis, one will come across the term ‘end of license raj’ often, which seduced the inquisitive reader inside me to delve more into it. As I went on reading, I had some fascinating manifestation of the gross blunders made by Mr. Jawaharlal Nehru (JN) during the first two decades of our independence, that have mostly resulted into all the subsequent mess this country has gone through. This blog is just an attempt to highlight some of the key facts and may interest only those who felt it interesting reading so far. Others may please go back to Facebook!

Not many of us know much about the name Ms. Annie Besant (AB). She was once a president of Indian National Congress during its initial years and chief mentor of JN. Both AB and JN were members of the club ‘Fabian Socialism’, which openly sponsored communist manifesto. AB writes in one of her memoires- “A democratic Socialism, controlled by majority votes, guided by numbers, can never succeed. A truly aristocratic Socialism, controlled by duty, guided by wisdom, is the next step upwards in civilization.”  She highly influenced JN’s thoughts towards adoption of socialism. Mr. Clement Attlee, British PM 1945-1951 who declared Indian independence from British rule, was JN’s friend and active supporter of Fabian socialism too, from whom JN was further inclined towards these theories. Labor Party came to power in Britain after WW-II defeating the war hero Winston Churchill and Attlee’s Pro-socialism policies made deep impact on JN’s mind, who had just started enjoying premiership of a nascent country.

At the doorstep of freedom, JN had two prominently established economic models to embrace for growth-1. The linear-stages-of-growth model- It posits that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption". 2. Structural-change theory- It deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a "more modern, more urbanized, and more industrially diverse manufacturing and service economy."

JN embraced the first one, perhaps because it sounded so nice! JN was a man of dreams, yet his dreams often lacked rationale and concrete planning. He was a fairy-tale visionary. The anti-agricultural stance of structural change (SC) theory disheartened his hardcore socialist soul and he chose to sacrifice the necessity of urban and industrial development for building of a nation. Of course there were certain shortcomings in SC theory too such as incorrect assumption of surplus labor throughout the year that can be shifted from villages to cities for other deployments, whereas surplus is only a seasonal phenomenon in India. Yet, it was still constructive in fundamentals than the 1946 Harrod–Domar model that JN embraced for The First Five Year Plan (1951-1956). It argued that production required capital and that capital can be accumulated through investment; the faster one accumulates, the higher the growth rate will be. It was a quantitative model, not a qualitative. So basically, it was like growth = saving! It failed to consider the basic reality in less developed countries that labor is in plentiful supply in these countries but physical capital is not. To fill this gap, it argued that poor countries should borrow to finance investment in capital to trigger economic growth; neglecting the overdue leverage that was imminent. The basic socialist requirements of this model such as land rehabilitation, development of agriculture and community might have attracted JN’s all the attention while adopting this theory.

This deficiency of H-D model was later corrected by Solow model, which brought in an important parameter to measure growth- the rate of technical advancement. It explained long run economic growth as a derivative of not only capital / saving but also of productivity, capital accumulation, population growth, and technological progress. In Solow's model, new capital is more valuable than old (vintage) capital because—since capital is produced based on known technology, and technology improves with time—new capital will be more productive than old capital. Unfortunately Solow model came in 1956 when First Five Year Plan had already succumbed to H-D fantasies.

It’s interesting to note that both H-D and Solow are ‘Exogenous’ growth theories purporting that externalities stimulate growth prospects. Later developed ‘Endogenous’ growth theory holds that economic growth is primarily the result of endogenous factors such as investment in human capital, innovation, and knowledge. Here, households are supposed to maximize consumption (part-1) and industries are supposed to maximize profits (part-2), while crucial importance is also given to new technologies and human capital. It’s indeed leading towards a balanced and sustained growth in long run. China has followed its part-2 so far by promoting the exports, but they haven’t taken care of part-1. That’s why economists want China to increase its domestic consumption to maintain its growth, which after a long march in double digits has now slipped into single digit.

Well, coming back to JN, of course his gamble failed in First Five Year Plan. So, JN turned to a budding new socialist economist- Mr. P. C. Mahalanobis. He had developed a new growth model called Feldman–Mahalanobis model together with Soviet economist G. A. Feldman. The essence of this model was a shift in the pattern of industrial investment towards building up a domestic consumption goods sector. It suggests that in order to reach a high standard in consumption, investment in building a capacity of production of capital goods is firstly needed. A high enough capacity in the capital goods sector in the long-run expands the capacity in the production of consumer goods. This model had some very fundamentally wrong assumptions- most important being considering India as a “closed economy” where it’s assumed to be self-sufficient without any import-export. Also, investment was considered to be determined by supply of capital goods only. Other sources of capital such as tax, public saving etc. were not considered at all. Yet JN loved it, as it still didn’t ask for private industries! Second Five Year Plan (1956-1961) was built on this model and Result? State owned, operated and controlled means of production in key heavy industrial sectors, discouragement to Private activity and entrepreneurship through regulated permits, nationalization of economic activity and high taxes.

There was one lone warrior in Congress who vehemently opposed to JN’s anti-national and pro-communist policies. His name was C. Rajagopalachari (CR). When JN perceived Hindu Mahasabha to be the greatest threat to the nascent republic, CR openly held that the Communists posed the greatest danger. He parted away from Congress eventually and founded a new ‘Swatantra Party’ in 1959. CR is the person who coined the term ‘license raj’! His party opposed the Nehruvian socialist outlook of the Congress Party by advocating free enterprise and free trade and opposing the license Raj. Referring to CR, Sarojini Naidu, who was never on good terms with him, had once remarked- “the Madras fox was a dry logical Adi Shankaracharya while Nehru was the noble, compassionate Buddha”. However, as the fate would have it, Congress reined the power nevertheless and India craved for growth endless.

Third Five Year Plan (1961-1966) was an utter failure owing to two main reasons- first being fundamentally weak base for economy due to failures of earlier two plans and second being two back-to-back wars with China in 1962 and with Pakistan in 1965. The target growth rate was 5.6%, but the actual growth rate was 2.4%. Due to miserable failure of third plan, the government was forced to declare "plan holidays" (1966–67 and 1968–69) and customized three annual plans during this intervening period, thanks to the bold decision of Mr. L. B. Shastri (then PM), who had courage not to blindly embrace JN’s posthumous fanciful ideas. In these annual plans, equal priorities were given to agriculture as well as industries and the first constructive step towards private industrialization was taken during this period. It seemed to collect the scattered pieces of economy gradually, but again fate didn’t allow it. LBS died in 1966 and the power came back to one more socialist leader- Indira Gandhi !!

Well, Indira was per se a historic and larger than life personality. She wasn’t fanciful like her father, rather she was too solid for a woman. She was like an immovable object, which will deflect an unstoppable force but won’t move an inch! But in her heart, she was purely socialist and believed in ‘stalinization’ of nation rather than ‘liberalization’. I will try to give an account on further nosedive of Indian economy till the time of being on the brink of bankruptcy in 1991 in the next part of this blog. I just have started writing it and I am doubly excited to write about Indira, whom I really respect as a leader of substance despite many differences of opinions. It takes guts to control this country single handedly for 15 years. Before Rajiv tried to consolidate the economy in 1985, it had taken many blows already under the dictatorship of her mother. Let’s review the same in short while!

Till then, my hands rest and arms open for comments.

Spot fixing- clueless or shameless?

Before the jaws drop at the idea of ‘how can a spot fixing be clueless’, let me put a disclaimer that this is not about the (in)famous cricket spot fixing scandal in which some idiot cricketers earned money and lost careers. This is about the whole confounding and entangling scam around the recent NSEL (National Spot Exchange Ltd) debacle which brought down not only FT (Financial Technologies- NSEL’s parent company) shares but also sensex and whole market. It’s been more than a week to the event and still market hasn’t recovered. I am since then trying to be inquisitive about what could be the exact relation between the scams and sensex and believe me, the deeper one digs, the clumsier it becomes!

For those who are unaware of what exactly went wrong in NSEL, it can simply be put like this- Being a spot exchange, NSEL is allowed to sell short term forward contracts of underlying commodities. When MCX (Multi-Commodity Exchange) was founded by FT promoter Mr. Jignesh Shah, his entrepreneurship was lauded and it really made sense at that time, since commodities remained really undervalued till MCX was launched. Then, to increase liquidity and volatility in commodity market, FT established NSEL to sell spot futures with the max. contract period of 11 days. But NSEL unduly  exploited the leverage and went on selling dual forward contracts, one short term and one long term, on the same commodity- say one with T+2 maturity and the other with T+28. Now, an investor could take a long position on T+2 contract and simultaneously enter into T+28 contract with short position, pledging the underlying commodity which never came into his custody. The difference between these two contracts stood around 15-18%. This means the investor would have typically 18% RoI in a month’s time, that too in a highly liquid market. The basic purpose of a spot commodity exchange was to promote commodity pricing to bring the markets to a supply-demand-speculation equilibrium. But with above trading, this basic purpose itself got defeated as these instruments were rather used as short term money making instruments. The fact that you could enter into long term forward contract without actually possessing the underlying commodity enabled the money laundering sharks to circulate oodles of money again and again through the process by rolling over. Typically, the borrowers (purchasers of forward contracts) would be the businessmen (mostly real estate) who were in need of money for short term, who got it in above way for a scanty 15-18% cost of capital, whereas the investors (buying T+28 contracts) were happy too since no other product in the market would give guaranteed 18% returns in a month’s time.

Does this ring any bell? Seems like heard somewhere earlier too? If you feel so, I am thankful that there are others too who got the same doubt. Only 5 years ago, when Lehman Bro. went bankrupt over sub-prime lending crisis and it had a domino effect of pushing the world into a deep financial crisis, something similar happened, didn’t it? Prices soared even when the underlying asset (house price in 2008 crisis) had no material appreciation only due to unethical speculators and shameless rating agencies vindicating these sensibly illogical products as “highly recommended”. My grandfather used to say- “promise something to someone only if you have it”. It seemed like an average-intelligence common sense at that time, as any sane person would know it. But I guess limits of sanity vanish in thin air as you grow bigger in financial market.

Why to go to USA actually looking for a reference? Take our own country and our own Bombay Stock Exchange for example. In 1992, before Sucheta Dalal exposed the scam, Harshad Mehta and Ketan Parekh also did kind of similar things. Harshad Mehta brokered for the “ready forward” deals between two banks or two parties, wherein instead of earning commissions of thousands of rupees, Mehta embezzled crores of rupees into the market and artificially blew the stock prices out of proportions. All it took for him to get hands on counterfeit BRs (Bank Receipts) which he could exchange with lending banks while purporting to be brokering for an invisible borrower pledging the BRs and voila! He could get truckloads of cash in return. Well, ‘how’, ‘why’, ‘when’ are the questions only for innocent investors like you and me who invest in market believing in its potential to reflect the true economy. For the financial institutes out there who are the trustees of our money, it’s all about getting maximum leverage and pouring in the excess leverage again into the market so as to burgeon their balance sheets and turnover figures. None cared to carefully verify the authenticity of the BRs being traded. Result? Yes, Mehta and Parekh did go to Jail and then chairman of Vijaya Bank did commit suicide fearing the ignominy, but who actually burnt their fingers? It was us, the public, who invested in good faith and are still visiting courts to get their money back, even after 20 years.

Let me come directly to the point before someone starts thinking about it as an outcry of a chronic loser who has lost money in the market due to NSEL/FT/MCX crash. Well, I am not much leveraged into stock markets and have hardly tried my luck so far in F&O, the only reason being lack of risk appetite. Here, my point is only to make out that people indeed know what they are doing before something like this goes wrong “suddenly” and then a chaos spreads. We loved the Joker in ‘The Dark Knight’ and some of us even clapped in theaters when he said- “I am an agent of chaos”. But some of us are indeed agents of chaos, as they keep on wrongdoing while knowing it for sure that it’s going to go haywire someday. We have so many regulatory bodies who are supposed to look over the operations of market movers so that scams and scandals are kept from happening. Frankly, SEBI & CCI have been indeed doing well in this regard, but when it comes to derivatives markets, FMC still seems like either a toothless tiger or a headless elephant to me. Regulatory authorities should really be conservative, however unfair it seems to market prosperity. What we need is a sustained and pragmatic growth, not a frenzied and ephemeral one! Western models of promoting market prosperity have been proven wrong again and again so far and the think tanks in these countries are now contemplating over the austerity measures. Some of them are believed to be in touch with RBI to teach them ‘control’. I wonder if they will change their minds after seeing how RBI “controlled” the rupee recently.

Govt. is still speechless when the press asks- why FMC was sitting over the decision of NSEL procedural short-comings which were spotted at least a year ago. Are these decisions also “timed” perfectly? Did someone influential say in a high-level FMC meeting -“ hey, let’s wait for a downward spiral of sensex and only then ask NSEL to stop spot trading and settle the outstanding contracts first. By that way, it will cause less harm.” So, meanwhile, the clueless investors may continue investing and the shameless onlookers may continue having fun watching them.

I am sure every one of us has asked himself/herself this question at least once in a while- “is the sensex true reflection of market potential or economy?” The real question is how many of us got a convincing answer to this question. 

And our beloved finance minister quotes- “people buy unnecessary gold, which widens CAD and rupee so depreciates.” So folks, it’s us who are responsible for everything, not the government!

But there is a point in FM’s quote, however illogical it may be. We should really stop buying gold, as we have to have some reserve cash to buy onions J J

Secularism Vs Hindutva

Irrespective of whichever party you support, all of us do possess some awe for the magnitude of NaMo charisma that spreads over this country day by day like an epidemic. The man has got power undoubtedly. Even if he dons on and off various veils time to time depending upon the audience he is facing, still his every mask has got a group of admirers. He talks like he knows what he is doing and what you are going to do. Day by day, one can see elevating confidence in his statements, propaganda and interviews. His mike goes off and he spontaneously makes a cunning statement winning the applause.  The dark knight of Indian media (read Arnab Goswami) asks him about his critics who claim Namo’s is not an inclusive growth and he replies like a roaring tiger thrashing the prime ministerial most-coveted address from Red Fort with such  an astute analogy that the viewer will never understand that actually he didn’t answer the original question. A nobel laureate says he wouldn’t want NaMo as PM and he is asked to return his Bharatratna.  This arguably the most formidable leader of recent times enjoys stupendous support from his party colleagues who are of the strong opinion that only NaMo can bring BJP to the power. Adding meaning to their assumption is the recently concluded survey poll by CNN-IBN, which reflects the national sentiment swaying away from UPA!

The man debates over the issue of development and growth, defends with the proved and lauded examples of his own state, asserts that he can do it all the same on national level and claims that he deserves one chance! At the other side, his opponents have their plate full of scandals, scams, embezzlements, misappropriation of public money, dishonoring people’s favorite ‘Anna’ by deferring Jan Lokpal, resigning corrupt ministers, overpowering industrial lobbyists, tumbling stock exchanges, burgeoning fiscal deficits, exiting foreign investors, depreciating rupee, appreciating oil, victorious litigants spanking taxman, porn-watching senators, ‘CAG’ed PSUs and Digvijay Singh!

That’s why, NaMo’s critics are left with only one punch- secularism! They claim that NaMo is far from being secular. Moreover, they insist that NaMo is actually a sponsor of Hindutva. I read a lot on this in newspapers and see many individuals / agencies pushing the same on multi-faceted noisy and unprofessional televised debates often anchored by equally unpalatable reporters. I feel sad at how the concept of Hindutva is being downtrodden so mercilessly in this all gamble of TRPs and money. Amongst all those perpetrators of anarchism, how many actually know the meaning of ‘Hindutva’?

Veer Savarkar, the pioneer of the concept of Hindutva, regarded it as an ethnic, cultural and political identity. Hindus, according to Savarkar, are those who consider India to be the land in which their ancestors lived, as well as the land in which their religion originated. He advocates the creation of a Hindu state in that sense. He includes all Indian religions in the term Hindutva and outlines his vision of a "Hindu Rashtra" (Hindusthan, as our country used to be known at that time) as "Akhand Bharat" (United India), stretching across the entire Indian subcontinent. I reproduce extracts from one of his notable works that offers a categorical distinction, which is a common misconception in masses cherished so carefully for decades by our shameless political leaders.

“Hindutva is not a word but a history. Not only the spiritual or religious history of our people as at times it is mistaken to be by being confounded with the other cognate term Hinduism, but a history in full. Hinduism is only a derivative, a fraction, a part of Hindutva. Unless it is made clear what is meant by the latter the first remains unintelligible and vague. Failure to distinguish between these two terms has given rise to much misunderstanding and mutual suspicion between some of those sister communities that have inherited this inestimable and common treasure of our Hindu civilization.”

In fact, even Hinduism is not a narrow word. Hon’ble Supreme Court of India, in one of their landmark verdicts in 1995, has quoted following-

“Hindutva is indicative more of the way of life of the Indian people. It is not to be understood or construed narrowly. It is not Hindu fundamentalism nor is it to be confined only to the strict Hindu religious practices or as unrelated to the culture and ethos of the people of India, depicting the way of life of the Indian people. Considering Hindutva/Hinduism as hostile, inimical, or intolerant of other faiths, or as communal proceeds from an improper appreciation of its true meaning.”

There are three contemporary judgments of Supreme Court on this issue. Interested may refer legal literature on these cases- Dr. Ramesh Yashwant Prabhoo Vs Shri Prabhakar Kashinath Kunte and Others; Manohar Joshi Vs Nitin Bhaurao Patel & another; and Prof. Ramachandra G. Kapse Vs Haribansh Ramakbal Singh.

Of course, our so called ‘leaders’ are simply unaware of this knowledge in public domain. Hence, they don’t understand the meaning of the word and they use it the most inappropriately, exactly contrary to what Supreme Court has asserted.

To be very frank, I am least bothered about what NaMo actually thinks or supports. I don’t even have a slightest interest in the all sensational media melodrama that unfolds almost daily on every news channel in this country and watched by billions everyday in million households. Yet I care, as not all of the audiences know the truth behind what they are watching. Use of NaMo’s strong media appeal to propagate the so called ‘murder of secularism’ theories by his opponents / critics may be ok considering the free press and fundamental rights of expression conferred upon Indian citizens by the constitution of India. But bullying Hindutva as ‘anti-secularism’ is absolutely wrong and in fact illegal, considering the dashingly clear SC verdict on the same.

A judgment of Supreme Court is treated as the law of the land and is coveted with much respect as it becomes a precedent for subsequent similar cases. Yet, in this case, NaMo’s charisma (available readymade to the perpetrators of this heinous crime of demeaning the sacred word Hindutva) is being exploited to sell extremely radical and anti-national sentiments. The mood of the nation is not so good currently to digest these unethical mockeries so easily. Such provoking appeals only produce IMs, LeTs & JeMs. Terrorists are not made in factories, they are made so by the way they are made to live.

Will any of my friends out there in those NGOs please file a PIL in Supreme Court for banning the use of word Hindutva is wrong context?

Two warring scholars fighting over a trivial perspective...

It feels so bad to see Mr. Amartya Sen and Mr. Jagdish Bhagwati exchanging such verbose attributes at each other since last many days. While both of them are pioneers of fundamental macro-economic principles, the root of the quarrel is quite superficial, if looked at by an onlooker of average intelligence and reasonable mindset. One of them argues that growth is a priority over the PDS (Public Distribution System), while the other defends that demographic prosperity through systemic centralized efforts are to be undertaken first and growth will follow as a natural consequence!

Both perspectives look correct, don't they? In fact, in economics, there is nothing right or wrong. It's always only a perspective of an individual based on his own perceptions. Then, why is there an audacious urge to prove oneself correct and the other wrong? Why can't they both be right at the same time?

Both Mr. Sen and Mr. Bhagwati are outstanding achievers and do command full respect for their theories, of course based on deep research and empirical supporting data. These prominent economists have been quite liberal while bench-marking their theories with obscure statistics, but when pragmatism prevails over, it will be evident that the riposte is being put by each of them only for the sake of it over the issues put forward by each other. They are indeed defending the classic models for inclusive growth, but while doing so in their own customized ways, they themselves have not been 'inclusive' towards valid points of each other. This is where exactly a common follower of economy like me gets confused, as his rationale behind understanding the theories gets contravened when the other contrary preponderance takes over.

What frustrates more is when I read some tabloids comparing this fight with the great (farcically used) NaMo-Rahul fight. I mean, come on, we are talking about two scholars here! One is nobel laureate and the other is equivalent in every way, if not superior. These two are academicians, not bloody politicians. Tomorrow I won't be surprised if some shameless reporter goes even further and compares it with SRK-Salman fight! God save India from such a journalism...