Vijay Kumar Gaba

"Communists are people who fancied that they had an unhappy childhood."

—Gertrude Stein (American, 1874-1946)

Word for the day

Netiquette (n)

The rules of etiquette that apply when communicating over computer networks, especially the internet.

Malice towards none

The question after all is "Will the Lotus finally bloom in TN?"

First random thought this morning

As per the latest Global Nutrition Report, more than half (51%) of all women of reproductive age in India are anemic. Not a medical expert, but I do believe that an anemic women is less likely to give birth to a healthy child.

One wishes, the government would accord the same priority to the quality of life index as it does assign to the ease of doing business index. After all, finding adequate number of healthy workers is also an ease of doing business matrix.

The thought came to my mind because our health minister, like all other ministers, had promptly commented on the recent jump in India's ease of doing business ranking, though no mention of this poor position on Nutrition index has been made.

For record, in past a BJP leader from Gujarat had attributed these anemic conditions to women's dieting habits adopted for vanity purposes.

People over Markets

Many readers have commented on my yesterday's post (see here). The most popular view is that I should not delve too much into technical jargon or background material; rather I should present my own views and suggestions based on my own assessment of the situation based on my personal experiences.

I bow to my readers' wishes and promise to keep posts simple and straight.

Now coming to the issue of finding suitable policy choices, determining the most appropriate amongst these choices, evolving a robust policy framework and establishing strong institutions to manage the policy framework so evolved - I have following to offer.

In my view, since independence the core of Indian economic policy framework has been Feudal; regardless of the fact that it is has been disguised as Socialist, Semi Socialist, and Largely Free Market at various points in time. Our political class has always taken pride in positioning themselves as the "Provider", rather than working as an "Enabler" of enterprise and "Trustee" of resources.

It is critical to note that after three decades we have a political establishment with overwhelming dominance. The overriding influence of the central leadership over the vast area of dominance (BJP ruled states now encompass ~60% of Indian population) allows near seamless economic integration of many large states like UP, MP, Maharashtra, etc.). At the same time the strong aspiration of BJP leadership to rule over the rest of the country (especially Bihar, West Bengal, Odisha and Karnataka) motivates them to focus on economic development of these regions as well.

The urgency and commitment shown in implementation of GST is more popular indication of the economic integration efforts of the incumbent government.

The even more relevant efforts include pan-Indian approach for railways and highways expansion, an apolitical approach for power sector reforms, efforts to establish a nationwide agriculture market, gradually phasing out tax incentives on area specific investments, amendment in mining laws that allows the mine holding states to draw a larger share in royalties and incentivizes putting manufacturing facilities closure to raw material, etc.

Replacing the legacy Planning Commission, which was empowered to make development plans in consultation with states, with a more advisory body NITI Aayog. While both the bodies came into existence through executive orders and depend on the government's will, the planning commission had assumed an important role in the 5yr plan based development model adopted by India since independence.

The new design however appears to suggest that we no longer want to follow the central planning model that was loosely based on the Soviet command based economic development model.

But at the same time, it nowhere suggests that we are ready and willing to adopt the laissez-faire model of USA, where markets are free and federal states are materially powerful.

Reconstitution of PMEAC also highlights the intent to accord more importance to the market economists over the development economists who have so far dominated the Indian policy making arena.

Though the intent and effort of the incumbent government to bring about changes in policy framework are commendable, in my view the Incrementalism may not be an appropriate strategy in current circumstances.

What we need is a revolutionary change, in the real sense of the term.

In my view, the feudal or quasi colonial model of development, that our successive governments have adopted, is not desirable. Considering the diversity of our country, and character of our democracy, we need to follow a participative model of development, where the local communities are made equal partner in the process of development. The focus of development should be people and not markets, which unfortunately has been the case in past three decades of economic reforms.

Also see

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing

Fiscal & monetary policy - avoid adhocism, focus on reforms

Don't mistake corrections for reforms

Public expenditure declining in quantity and quality

Trust your own people

In pursuit of appropriate policies

Tuesday, November 7, 2017

In pursuit of appropriate policies

"The thing that differentiates man from animals is money."

—Gertrude Stein (American, 1874-1946)

Word for the day

Atemporal (adj)

Free from limitations of time

Malice towards none

Is one of the finest Indian actors of current times, Nawazuddin Siddiqui, following the path taken by the likes of Om Puri, Raghuvir Yadav, and more recently by Kapil Sharma.

First random thought this morning

There are many Indian youth in their 20s and early 30s actively participating in financial markets in various capacities, e.g., analyst, advisor, investor, trader and even money manager.

Most of these youth may not have real life experience of rising inflation and rates, a bear market in equities and bonds, financial crisis of global scale, high volatility, etc.

It may be appropriate time for them to take a break and study the past carefully and skill themselves in strategies for a market that may not be too benevolent.

In pursuit of appropriate policies

I have cited this example, in one of my earlier posts. I would like to reiterate it before I offer my views on the reforms in Institutions of Economic Governance, that has been identified as one key area by PMEAC for fostering economic growth.

Most of us would have encountered traffic cops hiding behind trees, electric poles, etc., waiting for someone to commit a traffic crime like jumping a signal or violating the prescribed speed limit.

It is usually annoying on an isolated road with scant traffic. Some of us would have little motivation to obey traffic rules under such circumstances. Many a times we even would not notice the traffic signal as there is no traffic on either side of the signal. You leisurely cross the signal and suddenly two cops spring up from nowhere waiving at you to pull over. Thereafter usually some negotiations are pursued and a suitable deal is arrived at.

But have you noticed that these traffic cops are usually not seen where serious traffic jams take place every day morning and evening. Have you ever seen a traffic cop filling a small two feet wide pit in the middle of the road, that is causing traffic jam of several kilometers. At least I have not.

So where is the disconnect?

In my view, the disconnect lies in the orientation of the personnel assigned the duty to manage the traffic on roads.

I did speak to some of them, asking "what is your primary duty?" A majority of them said "to enforce traffic rules". No one said "to ensure safety & security of people using the roads; maintain smooth flow of traffic; and/or properly guide the road users". None of them was aware of the bird named "right of way" on the road.

Prevention does not appear high in our priority of things. Punishment is what we pursue vigorously.

This perhaps applies to the whole spectrum of the public compliance management system - be it police, taxation, civic administration or anything else.

One may argue that it's not only the public compliance system, but the personal management also; as reflected in disease management at household level (including overwhelming use of self medication).

Our schools teachers are also mostly focused on the "marks obtained" by the students rather than focusing on the overall learnings and personality development of the students, including inculcation of traits like patriotism, nationalism and compliance.

Consequence is that we are popularly regarded as a society which is cynical; argumentative; performs only when whipped; complies only for the fear of punishment; and usually puts personal interest before the common interest. The trust abyss between police/security forces and citizens is also a consequence of this orientation.

Now coming to our main topic, it is pertinent to note what Joachim Ahrens highlighted in his 2002 book titled "Governance and Economic Development".

As per Ahrens, in the decades of 1980s and 1990s, the developing world has experienced two events of lasting significance.

First, external shocks, particularly the debt crisis at the beginning of the 1980s, hit the less developed countries (LDCs) and contributed (along with underlying policy weaknesses) to economic stagnation, a decline in real per capita income, and macroeconomic instabilities.

Secondly, a number of countries moved away from authoritarian rule towards democratization.

Numerous countries in Latin America, Asia and Africa responded to these shocks by abandoning their state-led development strategies mainly based on import-substitution policies and embarking on market-oriented economic policies emphasizing privatization and external liberalization, as the challenge of economic policy reform became more complicated.

The coincidence of these historical processes raised the question about the interaction between political and economic changes and the political economy of policy reforms.

Since, the political, social and economic changes are obviously strongly correlated, it is important to understand what kind of political institutions are conducive to formulating, implementing and enforcing appropriate economic reforms.

Moreover, since economists have usually treated politics and institutions as exogenous, they have been observing the effects of policies on economic development, but have generally no analyzed the determinants of policy choices.

Meier (1995) identified a low level of savings, a foreign exchange constraint, the lack of human resource development, and neglecting the agriculture sector as significant constraints that limit the achievable rate of economic development. Meier argued that an economy's ultimate success in narrowing the gap between its actual and potential rate of development critically depends on the political leadership's commitment and ability to implement and enforce appropriate policies.

As Ahrens highlighted, these days it is widely accepted that the stability of a government, the pursuit of appropriate policies and capacity for sound public management are at the core of sustained development.

...to continue tomorrow

Also see

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing

Fiscal & monetary policy - avoid adhocism, focus on reforms

Don't mistake corrections for reforms

Public expenditure declining in quantity and quality

Trust your own people

Friday, November 3, 2017

Trust your own people

"Try not to have a good time... this is supposed to be educational."

—Charles M. Schulz (American, 1922-2000)

Word for the day

Bonce (n)

Head, Skull

Malice towards none

Any nomination for Twitter Vibushan award for Pidi?

First random thought this morning

Only 4years back, a brigade of enthusiastic youth driven by an septuagenarian ex-soldier had made politics an acceptable profession for Indian elite as well as middle classes. We saw a large number of people from across the social spectrum joining active electoral politics and committing to change the political landscape of the country.

But that momentum seems to have dies completely. The political ethos have recommenced their descent.

Who is to blame for the midterm abortion of political renaissance —Congress, BJP, AAP and other regional parties, or all of them?

Trust your own people

Before I discuss my view on public expenditure any further, let me ask you "what would be your reaction to the following situations?"

(1) Your housemaid comes to you and tells, "I have cleaned more than half the utensils. As you yourself told me that before hiring me, you were cleaning the utensils yourself and would do the job only every alternative day. In that light my performance is excellent. So, appreciate my effort and order a pizza for me".

(2) You are a branch manager of a bank. your clerk comes to you and tells, "I have cleared more than 65% of the checks presented today. In my view, it is an outstanding performance. Please allow me to leave early today."

(3) A young girl in your neighborhood gets molested and killed by goons. The area police inspector comes to the condolence meet and claims, "this year the number of heinous crimes in your area is lower by 30% as compared to the average of previous five years".

While you contemplate your responses, I may tell you mine - I will be incensed. My education & training that makes me obsequious may not permit me to react with violence, but if someone does it may not be totally unjustified.

Now extrapolate these conditions to the claims of our political establishment. After 70yrs if someone wants appreciation for partial execution on essential services like clean drinking water, primary health, electricity, access of all weather roads, education, two decent meals a day, clean toilets etc., it is deplorable in my view. I think the entire political establishment should be apologetic about it and commit to a time bound program for provision of a standard quality and quantity of all basic amenities to all the citizens.

Coming to specific suggestions for public expenditure reforms, I have been giving numerous suggestions from time to time. Some of these suggestions have in fact been implemented but in a more convoluted way. I would like to reiterate the following in particular:

(a) The government (both state and central) may exit all industrial activities. If under the present circumstances it is not found feasible to sell out all PSEs, consider transferring all PSEs under a listed holding company. Majority voting power in this listed holding company may be owned by Indian citizens with no individual owning more than 1%. All these companies should be professionally managed with no intervention from the government whatsoever. Dismantle all departments and ministries managing these PSEs.

(b) From my experience gained through extensive travels across the length and breadth of the country, I understand that there are numerous democratic assemblies within various communities and localities in our country. Most Indians not only feel comfortable working with the members of their own community, but are usually honest, dedicated and more productive when operating within the network of their “Own people”.

This “communalism” is arguably a key strength of Indian society. Therefore, in my view, the social ecology model suggested by author and activist Murray Bookchin which advocates a “stateless, classless, decentralized society consisting of a network of directly democratic citizens' assemblies in individual communities/cities organized in a confederal fashion” appears relevant in our context.

Unfortunately, our politicians and social activists have dissipated the term “communalism” to mean intolerance and hatred towards other religions, especially amongst Hindus and Muslims. This debauchery has introduced many distortions in our socio-political order. In my view this needs to be corrected as pre-condition before we begin working on any course correction.

Allocating resources to these democratic assemblies within the society for creating social infrastructure and managing it for the larger benefit may not only minimize the cost of administration materially but also enhance the efficacy of the expenditure.

For example, if the government funds XYZ Samaj (a registered association of people belonging to same ethnic or religious community) construct and manage an educational institution or healthcare center for the members of their community and others as well, the outcome is more likely to be positive than the government doing the job itself.

Let SC/ST/OBCs construct schools and colleges for their kids and manage these as well. The impact, in my view, would be phenomenal.

Similarly, management of water bodies, rural roads, primary health, skill & training etc. may also be assigned to local Panchayats.

(c) The rise in aspirational consumption; distortion of social customs (especially marriage, death, birth) for the sake of vanity, ignorance, and misguidance; rise in crime and litigation expenses; rise in cases of chronic diseases and hence prohibitive healthcare expenses form an overwhelming part of "household" debt". This debt usually has nothing to do with asset creation, education or skill enhancement.

To solve this conundrum, it is important that economic reforms are implemented with social reforms.

The social initiatives like focus on cleanliness, cooking gas connection to BPL families are commendable. But what we need is a social renaissance. Small correction and incremental improvement might not be enough given the serious nature of the problem, in my view.

I am not a social scientist. I may therefore not be an appropriate person to suggest the steps that could be taken within the Indian sociological framework. But this does leaves me at freedom to throw some thoughts that may not belong to the box. For example, consider the following:

(i) The government should take strong affirmative steps to eradicate social distortions that have crept in over a period time in our social, religious and cultural events.

To begin with the government may totally nationalize the religious part of the birth, death and marriage ceremonies.

The government may appoint qualified religious persons (QRP) who can perform these ceremonies at the designated venues established by government in every Block of the country . All the expenses like salary of QRP, cost of performing the rituals, food offered to QRP, cost of feeding upto 25 close relatives of the person for whom the rituals being done, etc. may be borne by the government.

The designated officer at Block level may be appointed to supervise all such ceremonies and issue certificate (Birth, Death, Marriage) on the spot.

The government may actively discourage any profligate spending on the social part of these events. All expenses on marriage & birth related parties and social functions relating to death, shall be taxed @100%. Meaning, if anyone wanting to spend Rs10,00,000 on marriage party of his/her child, shall be required to pay an equivalent amount as tax. This money may be used exclusively for performing the religious ceremonies stated above.

(ii) A dignified birth and death shall be made fundamental right of every citizen.

In case of birth, the government should assume responsibility of the child from the conception stage, for upto two children for each mother. This includes good diet for mother, medical tests, medicine, delivery expenses and immunization of the child. This should be done on a global standard basis not the way typical government medical facility is run by the government.

In case of death, the final rights of the deceased should be performed in a dignified manner, as per his/her religious traditions. This should apply to all unclaimed and unidentified bodies also.

The insurance companies may be directed to make the claim payments on the spot when the final rituals are done on 13th, 17th or 40th day as the case may be, in cases where the deceased's life was insured, either individually or under some government group scheme.

The corporates may be required to fund this initiative under their CSR obligation.

Also see

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing

Fiscal & monetary policy - avoid adhocism, focus on reforms

Don't mistake corrections for reforms

Public expenditure declining in quantity and quality

Thursday, November 2, 2017

Public expenditure declining in quantity and quality

"My life has no purpose, no direction, no aim, no meaning, and yet I'm happy. I can't figure it out. What am I doing right?"

—Charles M. Schulz (American, 1922-2000)

Word for the day

Psychomancy (n)

Occult communication between souls and spirits

Malice towards none

All those who termed Elphinston stampede as a national disaster, are distraught is Army is helping to reconstruct the bridge!

First random thought this morning

The only tangible underperformance of the incumbent government seems to be its inability to deliver on the expectations it keeps raising almost on hourly basis. Otherwise everything else is part of a linear trend that perhaps started two decades ago.

DeMo is a classic example. If the government had simply stated that we are replacing old 500 and 1000 rupee bills with new 500 and 2000 rupee bills to weed out the fake currency coming from Pakistan and Bangladesh, it would have been a much simpler and smoother exercise. Projecting it as a panacea for all corruption and non-compliance has made it look like a disaster.

Public expenditure declining in quantity and quality

PMEAC has identified reform in public expenditure as a key focus area for stimulating the economic growth in the country.

In administrative parlance, public expenditure is a complex subject. It involves many classifications and sub-classifications like capital and revenue & capital expenditure, plan and non-plan expenditure, social & economic expenditure, recurring & non-recurring expenditure, etc.

I though like to view it in simple terms. In my view, public expenditure is the amount of money a government spends on (a) managing the administration; (b) creating assets; and (c) discharging its social, political and economic obligations.

The ideal situation for a developing economy, especially an economy that is at a take off stage, is that public spending should be higher. The incremental rise in public expenditure should ideally be used for creating assets and enhancing social services, and administrative and financing costs should gradually decline.

However, this has not been the case in India so far:

(a) The public expenditure as a percentage of GDP has declined in past three decades, from a high of 19% of GDP in FY87 to 12% in FY17.

(b) Share of investment (capital expenditure) in public expenditure has fallen materially in past four decades from a high of 43% of GDP in FY79 to 14% in FY17.

(c) The public expenditure on subsidies (From 1.29% of GDP in FY79 to 1.72% in FY17) and interest payments (From 1.73% of GDP to 3.18%) has risen sharply in past four decades, while allocation for defense has almost halved (from 2.28% of GDP to 1.11%) in this period.

(d) The public expenditure on social services has been generally lower in past 3 decades (averaging 3.8% against a high of 5% in FY90). During the global financial crisis it rose to 5.2% in FY11, and has declined steadily since.

...to continue tomorrow

Wednesday, November 1, 2017

Don't mistake corrections for reforms

" That's the secret to life... replace one worry with another."

—Charles M. Schulz (American, 1922-2000)

Word for the day

kobold (n)

A spirit or goblin, often mischievous, that haunts houses.

Malice towards none

Does the government has any clue how to clean rivers?

First random thought this morning

Let’s say a person kindly agrees to give me Rs100 every day but on the condition that I have to deliver 15% annualized return for all the tranches. I will probably start expecting Rs100 every day for the rest of my life but that’s not the point. Let’s carry on and assume that I do manage to find a stock with a price of Rs80, consensus target price of Rs92 (15% higher than CMP) and in my view, fair value more like Rs100 (on a 12-month basis).

So, I start buying the stock. Of course, others have also cottoned on to the idea and the stock moves to Rs90 after a few days (as discussed, my buying alone does not matter).

I am comfortable buying up to 15% below Rs100 as per the condition of my investor. However, the consensus target price has meanwhile moved to Rs104 (15% higher than new CMP) but my fair value is still Rs100. What should I do?

Should I still buy the stock? (Reproduced from "The bogus argument of liquidity", report of Kotak Securities)

Don't mistake corrections for reforms

Reform is the most abused buzzword in Indian context at least. The governments, policy influencers and opinion makers, politicians, popular commentators, and media experts have misused this terminology to classify all administrative changes and corrections, including as insignificant steps as eliminating or adding few columns in the return to be filed annually by the tax payers.

I have been insisting that the reforms must be distinguished from mere administrative corrections. A policy measure in order to qualify as "Reform" must change the status quo materially.

I f I may reproduce what I wrote few months back:

When faced with the task of catapulting the economic activity to a higher orbit it is imperative for the policy makers to distinguish between "administrative corrections", "systemic efficiencies" and "reforms".

For example, 100% FDI in insurance per se may not qualify as a reform if it merely enhances the capacity of insurers to take more business on a larger capital base. Making health and accident coverage compulsory for all employees and petty service providers, including domestic helps, drivers, porters etc., compulsory would be a reform.

From this view point, I suggest the following illustrative reform measure that may change the status quo materially.

(1) To exploit the demographic dividend fully and generate demand, accelerate the wealth transfer process. Defining the upper bound of wealth and introduction of material estate duty on people above the upper bound could be one method.

(2) Transfer the power to impose and collect direct taxes to the local governments. Local governments (Municipality or Panchayat) should be empowered to decide appropriate taxation structure and incentive formulae to achieve the objective of social, economic and gender equalities, sustainability and development.

For example, each local government shall determine which are the minority communities, or socially and economically backward classes in that locality and extend reservation accordingly. Similarly, each local council shall determine the development priorities and allocate resources accordingly. Given the diversified demographic, ecological and socio-economic profile, efficient policies for energy, education, employment, industrial development, ecology conservation etc could be worked out only at the local level.

(3) The ownership of public resources should be earnestly handed over to “the public”. Instead of few feudal ministers controlling the resources, the trusteeship of all the natural resources should be vested in the local governments. The local people should determine how these resources should be exploited. Industry based on these resources should be developed on co-operative model with equitable ownership of local people.

Also see

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing