Inflation, government and the people

The current phase of inflation seems to have undone much of the good that the UPA government created for itself through a “revolutionary budget” as Sonia Gandhi put it. The ‘Times of India’ describes this whole process as ‘pollonomics’. The government obviously wanted to showcase itself as a magnanimous organizing body which was compassionate enough to call of all the money which was due from the farmers, which was actually anyway lost, but calling it of at the most propitious time when elections are due would have resulted in electoral and political gain for the government. But now all that ‘good work’ (of a few weeks!!) may not ultimately give the government the edge that it needed for the next election. The BJP and CPI (M) are already threatening a nation wide agitation in second week of April if prices are not under control by then.

Whether the government will still win the election or not is a different matter, let us look at the phenomena of inflation that we are facing at the moment. First of all it is a global phenomenon; there is a jump in the food prices in the world market. Let us compare our inflation rate with the country we always like getting compared with for every reason, China. Currently China is growing at 11.4% and the inflation has hit a 12 year high of 8.7%, now that’s something to scream about, “inflation nearing 9%” almost sounds like “I have put on 20 kgs in one month and I have to lose the same in 15 days!” There is no doubt that bringing down the inflation rate from such a high rate not only takes a little time but it also affects the growth rate. We have already seen a drop in our economic growth rate to 8.7% from the high of 9.4% in 2007. Basically there is a clash between these two objectives of growth and maintaining price stability, but with both these figures going to their worse end we might have to face stagflation. Stagflation was a term employed by the supply side economists in the 70s, to describe the then existing economic crisis, and moreover they(supply side economists) held that these crisis had resulted because of neglecting aggregate supply in the economy and only focusing and framing demand managed polices which were advocated by Keynes. However, stagflation is not a properly defined term in economics, we know that when there is negative growth in two quarters continuously it is called recession, but there is no so such barometer which you plan plug in an economy and determine whether stagflation exists or not.

Now let’s look at the measures taken by the government to tackle the problem of inflation. First and foremost it must be mentioned that this problem will not be short-lived, as the latest report of the Asian Development Bank says that inflation will be a regular problem with the Asian countries. But the government undoubtedly has to do something for two reasons:

a) To ensure the welfare of the people

b) To win the next election (I can’t stop talking about it!)

So lets see what the government has done, first it has banned the exports of various commodities including rice, next it has abolished import duties to increase imports and increase supply of goods in the domestic market, then it has banned forward trading and recently it was reported that it is also taking measures to control prices of cement along with food articles by importing cement from Pakistan at Rs150-175 for a bag of 50 kg (it is sold at 225-240 in the northern states). Now all of these measures consist the supply side polices, along with that there are some monetary and fiscal polices also that he government might undertake, like increasing interest rates (it’s actually done by the RBI) tight money supply to prevent demand pull inflation and appropriate fiscal management. Apart from this the government also considers increasing food subsidies to bring about temporary stability in prices. However, while all these policies are being implement it is interesting to note that currently many countries are facing the problem of inflation, therefore they are also implementing similar such policies if not identical, what happens then?? If our government decides to ban exports and abolish import duties to increase supply, it can happen that other countries are doing a similar thing; Saudi Arabia is already implementing these policies. So how then does the government proceed with this problem? Im not saying this is happening per se at the moment, but currently with many countries facing a similar problem this is a theoretical possibility.

It is needless to say that the above policies will affect growth and in turn the stock market but this is inevitable, controlling inflation at the moment is of utmost importance, all the national newspapers can wait for a few months to write their favorite headline “Growth back on track” and “Sensex like never before”.

 

Union Budget and the Common man

I recently read a quote about the union budget, “The common man can’t understand the union budget, and the union budget can’t understand the common man!!” Although our current finance minister would like to contest the second part of the phrase, there is still no doubt that the common man can’t understand the budget. First of all the budget is prepared in complete isolation and secrecy. It is kept a big secret until ‘budget day’ for mysterious reasons. When every issue of national importance is discussed in a transparent and open manner in the parliament, why should the budget be an exception? Why is it that the finance minister straight away comes to parliament and reads out his speech and how he and his assistants have planned things for the entire year. The point that Im pressing here is that of transparency in the budget making process. Now let us see why the common man can’t understand the budget or why is it that he is not much interested in it, which in my view is the real reason behind his not understanding it. It is lack of interest not intellect which determines this. When Nani Palkhivala eminent jurist and economist delivered a lecture on the budget in brebourne stadium in Bombay, thousands of people used to come to attend the program, and were interested in knowing what is in store for them in this budget. Palkhivala could actually make a dry and boring subject like the budget interesting and enjoyable and moreover could simplify it from the technical economic language, which drove people to listen to him. His budget speeches finally ended in 1994. Today there are many people who deliver a similar lecture on the budget, lawyers, Charted Accountants, tax consultants; financial experts all express their opinions and views about the budget and its implications for the various segments of the population. But these people cater to a very niche audience. These are lectures where, businessmen, management experts, industrialists go and attend. It is difficult to find the common man here, who once sat in brebourne stadium and intently listened. After interest comes knowledge of economics or atleast elementary economics. Arindham Chaudhuri says “Economics is complex, mathematised, pseudo intellectual, quite unfit for the common man, around whom economics should actually revolve”. Reading and understanding the budget definitely requires good understanding of simple macro economics nothing more. And finally comes the role of the media in spreading the analysis of the budget far and wide. The print media does a very good job in analyzing the budget. ‘The Times Of India’ made a good presentation of the budget, simplified most of the provisions, especially the ones related to income tax and other taxes. They even showed how various sectors are affected by the budget. But the problem is with the electronic media. On the day of the budget, I saw 4 programs on television, on CNN IBN, TIMES NOW, NDTV and CNBC. All these programs were good but the problem is that they were only and only in english, the hindi news channels dint seem to cover the budget as extensively as the english channels did. This straightaway means that only the english speaking urban people will be able to understand what the panelists are saying. The panel members were almost the same in all the programs. Why dint some of the eminent panel members like Sitaram Yechury, Kapil Sibal and other financial gurus go on to atleast one hindi channel where they can explain the details to a much larger audience.

Economic growth a global trend……………

 

MS Swaminathan wrote an interesting article in the Times of India on 16/3/08. The article basically spoke about the high growth rates that India and many other countries experienced for about a year or so. He argues that the sudden high growth rate that we experienced is not only because of the government’s economic policies and efficiencies; it was actually a global trend which was originating from America. We know at the moment most Americans are living beyond their means, this is reflected in the sub prime crisis, the housing market slump and the mounting losses of financial companies due to increasing number of loan defaulters.  The demand for goods and services had tremendously increased for the past 2 years, which resulted in America having a trade deficit of $700 billion. China being the biggest exporter of electronic goods to America and India exporting various other goods and mainly services, thrived because of this one factor of excessive consumption in America. And because there was huge demand for goods there was automatically a huge demand for raw materials and semi finished goods which came from Africa and other less developed countries.  Hence even these countries immensely benefited. Therefore Swaminathan says that every country remotely associated with America enjoyed high economic growth, the African countries which were growing at 3% also started growing at 5%, similarly in India economic growth was 6% to 7% for many years it suddenly became 9%. If the above reasoning is true, then we have to ponder over a very important question, what is going to be the state of the Indian economy if there is a recession or slow down in the US economy which is very likely. There has already been a dip in the industrial production rate for the last 3 months. And the industrial production also determines the government’s collection of the excise duty. As it is as per the Union budget 2008 excise duty has been reduced from 18% to 16%, combine this with a fall in industrial production and it results in a loss of revenue for the government.   

 

Roaring corporate sector and a booming economy!! But what about the last man standing on the street??

“20000 points on the sensex, the economy growing at 9% have a good weekend” wrote economic times on one Saturday. It is indeed great to have a booming sensex and it’s equally good to know that we are one of the fastest growing economies of the world. But does it end there?? Is a booming sensex and a roaring corporate sector all we want for our country, where millions of people still sleep on the road. In the history of our country this is truly one of the most important eras because on one hand we are the front runners in economic growth and global investments. In fact in the Presidential debate of 2004 between President Bush and Senator Kerry, Senator Kerry assured the people of America that if he becomes President then he will prevent American jobs from being “Bangalored” and sent to India where a booming IT sector awaits the best talent on the globe. On the other hand we are also known to be the front runners in mal nutrition and poverty and illiteracy. Do these people who are mal nourished and illiterate even know why their country is respected globally? They don’t, and why should they?? When the hyped growth and the boom that Economic Times raves about has not gone even remotely close to them.

Therefore the time has come when we need to make economic growth more inclusive. The current pattern of economic growth is only favoring specific sectors of the economy. And therefore people associated with those sectors are also benefiting. But the people who do not come under the purview of those sectors are experiencing stagnant growth. An article recently published in the Navbharat Times pointed out that the present government or for that matter any government has a tendency to start worrying about things only when a worrisome situation gets created. While the situation is gradually going from bad to worse they are indifferent. The economic policies being followed by the current government have undoubtedly increased foreign investment, boosted economic growth and made India one of the preferred destinations on the globe for any kind of business and financial activities. But at the same time as a result of all of this, the government is forced to reduce the fiscal deficit as per the terms and conditions of IMF and WTO. Reduction in fiscal deficit results in declining expenditure for essential services like health and education. According to the Kothari commission led by Dr Vijay Kothari in 1966 expenditure on education has to be minimum 6% of the GDP but for the last several years it has remained between 2.5% to 3.5%. In the eleventh plan it is estimated to be at around 4%. Recently it was reported the IITs don’t have enough funds to pay proper salaries to its professors. IIT Bombay made a request to the government to give a grant of 20000 crores, so it can look after its basic expenditure. This is one of the implications of reducing the fiscal deficit that even the premier institutes are down in the dumps. IMF tells our government to reduce the fiscal deficit to control inflation. According to an article on the Indian economy, when the government borrows money from the RBI it tends to increase the quantity of money and hence it results in inflation. This argument has two flaws one that the new quantity of money doesn’t chase the same goods conventionally perceived. While the quantity of money circulating in the economy increases the production and output also increases. But apart from these technical details and principles, it is important to note that if the government reduces its expenditures on health and education then any significant development for the masses is not achievable, and then it’s meaningless to merely float on the fact that sensex is on 20000 and economy is growing at whatever percent when it is of no consequence to majority of the population.

Retail sector in India and corporate houses

Entry of the corporate houses in the retail market or for that matter into any sector is popularly perceived to be a part of economic growth. The increasing participation of the private sector is considered as one of the instruments of economic growth and job creation. Economic growth by itself creates jobs says Lord Desai a professor of economics at the London school of economics. But this I reiterate is a popular perception, whether the entry of corporate houses into every market and field is justified or not is a different matter. In my view it is incorrect to make general statements about economic growth and job creation, one has to be very precise when dealing with this subject. Economic growth I agree does create jobs; it does push the economy to a more productive stage. As the economist Rosenstein Rodan has said in his theory the “Big push” that for a plane to take off it requires a certain minimum ground speed, anything less than that and the plane wont take off, similarly to pursue economic growth we need to mobilize a certain minimum amount of investment, anything less than that is inadequate. And investment mobilization happens through the corporate houses or the private sector. So Im not against the private sector per se, but for the government and people to jump to a conclusion that the corporate houses no matter what they do and where they go will bring beneficial results certainly comes under a cloud of suspicion. To prove that the entry of the corporate houses into the retail market is beneficial we would have to rely on the theory of trickle down effect, but the trickle down effect is simply another way of saying that what is good for the business houses is good for the country, which is obviously not true. Trickle down effect has been named the horse and sparrow theory by JK Galbraith “if you feed enough oats to the horse, some will pass through to feed the sparrows.” Unfortunately today the horse is the corporate sector and the sparrow is the working class.

When we speak of the retail market we are primarily dealing with a section of society where the people are not economically privileged. Retailers at the lower end, like the vegetable sellers, the fruit sellers basically are the underprivileged section of the society, and when the government permits the corporate houses to enter this field with their attractive pricing strategies the government is practically wiping these 4 crore middle men out. And the justification given is “growth will create jobs for them as well”. For people who say my question is can you give a guarantee that those very 4 crore people will get their jobs back. And they are 4 crore human beings not ants who can be trampled under the feet of men.

Entry of the corporate houses into the retail market is a part of the de licensing policy which was started in 70s. Before the 70s most of the industrial production was handled by the public sector. In the 70s it was realized that the participation of the corporate houses is also very essential if we have to be on par with the rest of the world in terms of technology and capital. For this reason the license policy was scrapped out. Only industries of national importance like defense, railways, atomic energy were to be kept in the control of the public sector. So the purpose of the de licensing policy was to increase productivity. Today in 2007 if we analyze the repercussions of this policy we find that the corporate houses have increased productivity no doubt, but have also increased the divide between rural areas and the urban areas, between the bourgeois and the proletariat. This divide has very unfavorable social consequences which need to be settled first than increasing productivity for only a certain class of society.

 

Urbanization and environment

This was my speech for a competition, the topic was “Urbanization improves environment” and i was speaking for the proposition.

Urbanization this term has economic as well as social significance. Economic because it brings about a structural change in the way people function and seek jobs and this influences the economic activity of individual units of the population and the economy. Social significance is the natural outcome of the economic significance, as Karl Marx once explained, that a change in the economic system and structure has its social repercussions as well. Urbanization today is a natural and independent process; the percentage of population migrating to the urban areas is rising inexorably irrespective of the developments taking place in the rural areas. According Warren Thomson an American demographer as the economy expands its people move from the rural to the urban, now this movement may not necessarily be geographic movement of going to urban cities but a change in the basic character of a place where people live, a change from the rural character to the urban character. So taking into account this principle urbanization in my view is an inevitable process and a natural outcome of development.

Coming to environment, environment isn’t just air, water, land and resources, it also includes man, his activities and his material welfare. The two major factors determining the environment in the urban setting, is the population and the economic development. One of the distinguishing factors of urbanization is capital formation. Goods are made to sell and money is earned to buy, but certain amount of consumption has to be kept away for future use. Current consumption has to be used for creation of capital in future. As Prof Shahuraja has put it “It is necessary to break away from the vicious circle of poverty and initiate the virtuous circle of prosperity. To improve the environment investments in education and health are important and this happen only through capital formation. The rural economy tends to be self sufficient, now self sufficiency is not bad per se but to move to a productive level interaction between resources and saving of resources is necessary and it happens only through urbanization. Also urbanization facilitates mobilization of huge investments to initiate and implement new policies. As the economist Rosenstein Rodan has said in his theory “the big push” that for a plane to take off it requires a certain minimum ground speed, anything less than that and the plane won’t take off, similarly for improving the environment we need a certain minimum investment to be mobilized, anything less than that is inadequate.

Now speaking of development it is not just the addition of physical capital but also human capital Urbanization facilitates the training of human capital we may have the best of equipments and machinery but to match that, we need equally good human capital. We need skilled human capital for economic growth and development and we need sensible human capital to maintain social tranquility and political stability. Urbanization gives importance to education and practical training. Education ultimately has the power to pull the poor people from the lower end of the poverty line and push them to the upper and through urbanization education assumes importance. Urbanization also increases the prospect of revenue generation and revenue collection for the government. And this revenue is utilized to give essential services like education and health at a subsidized rate. So essential services like good health care and education are given at a subsidized rate.

Coming to the point of natural environment, at the outset I must say that man has always been in a conflict with nature. Man, in pursuing his interests and the interest of the community at large has had no choice but to alter the physical structure of nature. A water power project requires the construction of a dam and a reservoir and this may have an impact on the physical environment, it may even force a number of people to relocate themselves. But on the other hand, it’s difficult to exist without electricity. If environment is for the people even development is FOR the people. If we are sacrificing the natural environment to some extents we are creating value at the same time. Development always comes with a price, we have to ensure that the cost of any project or plan does not outweigh the benefits; if this balance can be maintained then we can certainly have sustainable development.

Now let’s examine the commodity of land under urbanization. It so happens that in the rural areas the population is scattered over a vast region of land, almost every piece of land is utilized either for living or for cultivation. And as we all know that the supply of land is scarce in relation to the demand, so effective utilization of land is very important since it’s a very important natural resource. Now urbanization concentrates the population into smaller land areas, leaving more land undistributed and therefore protecting it and making it available for other important activities like farming, and other agricultural activities.

Resources are constantly needed by cities. And one of the outputs of resources is waste and this waste has to be properly handled to prevent any serious damages to the environment. The waste hierarchy system plays an important role in waste minimization, it refers to the three “R’s” reduce, reuse and recycle. The aim of the waste hierarchy system is to extract the maximum practical benefits from products and to generate the minimum amount of waste. Another method is the extended producer responsibility, in this system the producer has to be accountable for the entire life cycle of the product, so firms which manufacture are required to be responsible for the products during manufacture and even after their useful life. Also the standard sanitation technology in urban areas collects waste water and treats it so that it can be left in the sea or lakes. So urbanization provides safer and better water and provides better sanitation facilities. So the crux of the matter is that although urbanization harms the environment and creates waste it ALSO ensures its proper handling and disposal, infact the input of resources and output of waste has been described as the metabolism of cities.

And finally at a social and cultural level urbanization improves environment because it increases the credence given to status of education or other merit based achievements and reduces the credence given to birth status which originally existed. So urbanization does improve the social, economic, political and cultural environment and it does sustain the natural environment.

Should Indian students working abroad be taxed??….Yes why not

The subject and concept of taxation has existed since 3000 BC, early taxation has been described in the bible, in genesis ch 47 mentions that “when the crop comes in, give a fifth of it to Pharaoh the remaining you may keep for yourselves and your children” So fourth fifth becomes 20% and 20% tax was levied even in 3000 BC. The eminent jurist and economist Nani Palkhivala has said that taxes like water have a tendency to find the lowest level, almost all the taxes ultimately hit the common man. Now in 3000 BC a person earning even 5 rupees was expected to give 1 rupee as tax that time taxation was a new concept but today it is not the case, if the income of a person is below a certain level he is not required to pay any taxes. It so happens in our country that people from the lower social strata are exempt from taxes because they dont have the capacity and people from the higher social strata are given benefits under income tax act because they are contributing towards economic development or increasing exports, so eventually the entire burden of taxation comes on the common man. So this system needs a sea change where only a certain class of people are heavily taxed and the remaining are either above it or below it. Hence one of the effective methods to change this is to tax Indian studets working abroad. Through this three main objectives are achieved, one it increases revenue for the government. Because firms located in SEZs are exempted from taxes and the government has been denied revenue from the BPO’s according to the supreme court judgment in the Morgan stanley case all this has resulted in a significant loss of revenue for the government, which has lea to an increase in the fiscal deficit, hence taxing students abroad will bring in revenue and reduce the fiscal deficit. Secondly the elite institutions were established in the 60s by out ex prime minister Nehru to generate a pool of talent to furthur the technological development and eventually economic development of our country, but because of globalization and attractive job offers abroad majority of these students went abroad and continue to go abroad. So paying taxes can be a compensation for this, that they acquire world class education at a much lower price due to government subsidy and they dont give anything in return, so taxation revenue now can become the return. The third aspect is Indian students working abroad do have to pay certain taxes there, so in addition to that Indian taxes shouldn’t be very high they should be reasonable, but the very fact a tax is imposed will discourage many students from going there to “earn higher and save more” this is usually the objective. They will in fact be able to save more in India and hence a pool of talent can be retained in India it self which was the original objective of Nehru when establishing the elite institutions.

To conclude I would like to elaborate the four principles of paying taxes according to Adam Smith in his book wealth of nations, equity, convenience of tax payer, economy and certainty and clarity. If these factors are taken into account while imposing the tax then it would certainly be fair for the Indian tax payer abroad and beneficial for the common man in paying taxes in India.