Underdeveloped-Developing-Transforming-Third World-New South

In an article in the ‘Hindu’ by Jorge Heine from the Balsille School of International Affairs, the subject is very interesting, the author speaks of the World Bank President Robert Zoellick now officially stating that the term “Third World” is now made redundant. This term was coined by Peter Worsely  in his book “The Third World: A vital force in International affairs”. The author of this book had spent many years after World War 2 in Africa and India, he had the first hand experience of how these post colonial countries were emerging. The author was particularly impressed by seeing how Nehru, Castro, Nkruhma, Nyere left behind the debris created due to colonialism and started the work of nation building.

Going by this perception of Mr. Worsely the term Third World seemed appropriate at that time, many other people at that time gave other terms like Underdeveloped, Developing, lower income each more disappointing than the other. These terms only tried to suggest that these Post Colonial countries only were a mere footnote to the real history.

In the sixties and seventies many nations in Asia, Africa and the Carrribbean were economically weak and were dependent on trade from the north, hence they created groups like Non Aligned Movement (NAM), UNCTAD, and forwarded proposals in the U.N  like New International Economic Order, sometimes these proposals got passed but very often they were not backed by any concrete reasons, they had little power apart from the voting rights in the U.N.

But over the last 10 years this scenario has changed substantially, countries like India, China, Brazil who are some of the fastest growing economies now “speak from strength not weakness”, they do not ask for aid but they want to trade. They expect a stronger say at the IFI, high table of global economic governance. Also another trend that has been observed is that these countries are not dependent only on the north countries for trade, they also trade among themselves.

Noted historian Ram Chandra Guha in a recent lecture spoke about why India is not and should not be a super power. The lecture was a kind of refutation to the media’s favourite headline “The Global Indian take over”, when there exists so much tension, conflict and disparity in our own society the take over in the world is “premature”. India’s domestic challenges and the situation with the immediate neighborhood demands more of settling immediate issues than any take over.

Therefore concludes the author the New South in the new century is going to be a strong force to reckon with. And the term Third World has been done away with.

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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.

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.

Correction in global equity markets due to sub prime lending crisis in US

There has been a mild correction in global equity markets for quite some time now, the roots of this correction can be traced back to the sub prime lending crisis which started in the US in 2006. Sub prime lending refers to the practice of giving a loan to a person who has had a bad credit history. For eg: a person takes a loan from a regular bank at the prevalent rate of interest but is not able to return the money in time or has defaulted payment. Now the next time he wants a loan regular banks will refuse to give it and therefore he has to go to a sub prime lender, who will give the loan at a much higher rate of interest. In short sub prime lenders give loans to people with a bad credit history.

 

  There are several firms in the US which are into this business; New century financial corporation is the second biggest lender in the US. Now the amount of loans that these firms can give depends on the capital that they have or the liquidity or deposits which they have. Hence once a loan is issued liquidity is depleted and now for giving a new loan they require new capital, hence to raise capital these firms sell that loan which they have issued to investment banks in return for liquidity which now becomes a new loan ready to be issued. And the debtor will now re pay back the loan to the investment bank. Since the sub prime lender has sold the loan of a person with a bad credit history to the investment bank there is a risk that he may default payment of a certain amount, hence the first 5% of default payment is paid by the sub prime lender to the investment bank, this is known as Collateral debt obligation (CDO). Now the question remains what does the investment bank do with that loan?? The investment bank starts securitizing these loans, they convert it into a bond and issue it in the bond market, its a mortgage backed bond, this bond is then further converted into a derivate. Derivate is a financial instrument whose value is derived from the asset which it is backed by, in this case it is the house for which the original loan was taken.

 

   Now the problem with this entire system is that till 2005 the number of payment defaulters in the sub prime market were 5% in 2006 this has gone to 14%. This is because of the “credit boom”, a person takes a loan under two circumstances, first when he has a good income and can afford to take a loan and second when credit or loans are easily available due to the financial system. A credit boom therefore brings those people in the loan market who earlier could not have afforded to take a loan due to their inadequate income. Because the number of payment defaulters have gone up a lot of houses have been confiscated by the banks and are up for sale. Since supply of houses is more than demand the prices of these houses have gone down substantially creating problems in the housing market. Now as mentioned earlier the loan for the house was converted into a derivate and since the value of the house has gone down the value of the derivate has also been severely affected. Hence the mortgage packed and backed security market (which includes bonds, derivate etc) has been affected and this has resulted in the correction in the stock markets in the US. It is said that when the US sneezes the rest of the world catches a cold, due to the  New York stock market being affected  all the stock  markets in the world are experiencing a mild correction, because US is an important trade partner and a source of FDI and FII.