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Dr. Arindam on Indian Economy

[A1]Raghuram Rajan is making things exciting, and it's not necessarily great news for India's crony capitalists!

31 January 2014 | Dr. Arindam on Indian Economy

Raghuram Rajan is potentially great news for the Indian economy. Anyone who talks about “Saving capitalism from the capitalists” has to be good news, for humanity per se. The IIT, IIM educated man is an intellectual of a relatively high calibre. Not that all his arguments are correct – mainly because of his lack of understanding of the positives of a planned economic system – but his heart is in the right place. Having spent most of his life in USA, his panacea for all ills, as expected, is capitalism. Where he scores however is his better understanding of capitalism’s ills and where capitalism’s ‘fault lines’ are. He has rightly championed the cause against monopolies and oligarchists – and that’s the key reason why he is the man India needs.

Rajan’s analysis about India very correctly observes that the big Indian billionaires (the guys I call “Blood billionaires”) are in those sectors where there is high government interference, and where licensing and price controls are highly prevalent. This is because this is where businessmen manipulate the government machinery and make their moneys. Thus, wealth gets concentrated in the hands of a very few and they keep becoming richer with the help of the government mechanism – the typical case of crony capitalism. Although ex-IMF people aren’t very easy to trust, the fact that from all his writings, one gets absolutely no feelings for crony capitalists, is what makes his presence far more exciting than the presence of most others before him. Perhaps before finishing his completely useless and disastrous tenure, Manmohan Singh without realizing has done India a great favour.

Before I explain further why Raghuram Rajan can do a lot of good, specially with his latest move, let me also comment a little on areas where he hasn’t been flawless. Amongst Raghuram Rajan’s bigger achievements is not just his ability to forecast the 2008 crisis, but also his competence of being sharper than others in understanding its causes and giving a better prescription to come out of it. Unlike another economist, Krugman – who happens to be one of my favourites and whose prescription is traditional Keynesian, a combination of fiscal stimulus of spending and investing more along with monetary stimulus – Raghuram argued that the flaw was on the supply side, that developed economies needed to free themselves from the bottlenecks of protectionism of firms and workers, and that they also needed to focus on retraining these very workers, making them more competitive and at the same time giving a bigger thrust to entrepreneurship at a smaller scale.

He is right to a large extent, and yet, here is where he goes wrong in his analysis of the American and European crisis and his suggestions become half baked. The problem is that it is not just an issue of supply side economics; there’s something deeper. It’s a fact that almost every earning citizen in the American and European economies has the next 15 years of income already spent through some or the other installment scheme on homes, cars, education et al. So stimulating the demand in these economies is an impossible task in itself; these countries need to realize this and come to terms with this factuality. Add to that the fact that the state of having material aplenty has reached that psychological threshold in these economies where making consumers buy more is becoming tougher by the day.

Thus, the real way for American and European companies to grow is to do to the African, Indian and Chinese labour force what Henry Ford once did to Americans. Pay them more so that they can buy American and European products and make these economies grow in turn – in simple words, develop these markets. So the real solution is to almost completely forget looking inwards for growth and instead look at developing the poorer nations instead. (Some would argue instead that Western economies should allow labour to freely flow into their nations so that Chinese and Indian educated cheap labour can replace American and European labour at half the cost; but then, this option obviously has various other complications and political repercussions, and therefore is an unlikely solution). This is inclusiveness at a global level, the real globalization of the world. This apparently can be called capitalism; yet, it is something that can be understood better by students of economic planning (at a global level) – I would call it global humanitarianism. The sooner developed nations, and their more human faces (the likes of Krugmans and Rajans) realize this, the faster these nations will spring back and so will the world. Else, it will continue to be like what’s happening now. An Apple or a Louis Vuitton brings out one landmark design to bring the American and European consumers out of their shells once a year; these are consumers who buy the product, and go back to their shells on the trot right after.

Although I think that Raghuram Rajan’s prescription for Western revival has flaws, I also believe India is a different ball game. It requires economics that is relatively devoid of larger philosophies and complications. We are where the West was decades back and our problems have more tried and tested solutions; and yet, at the helm, we require the key economics of having your heart at the right place. That’s precisely why Raghuram Rajan excites. His academic understanding of how free markets are beneficial, the important and visible role of governments in such free markets, at the same time his scathing attitude towards how the same governments are subject to being influenced by big private players, are what India needs at this point of time.

The need of the hour in India is to protect the free market from powerful and oligarchic private influencers, so that benefits of the market economy reach the masses and don’t remain limited to a few. Rajan believes in governments providing a social safety net, something that I am sure will certainly reflect in days to come in his decision making, through RBI policies that help the masses more than the richest few – be it through his measures to control inflation or his measures to control black money flow.

His latest act of doing away with pre-2005 notes proves the point, and to my mind, the move has great potential. Given the fact that he has no sentiments for crony capitalists, this actually is one of his initial big moves to entrap and finish off a large chunk of black money. Admittedly, till now, he has maintained that his move is not intended to flush out black money. Yet, the fact is that people with their huge stores of black money will no doubt find the going tough, as estimates say that pre-2005 notes in high values of 500 and 1000 make up about 20% of the total black money in circulation. Clearly, for those with black money inside the country, it will be a herculean task to identify and exchange this 20%.

As of now, the way the announcements have been made, it seems that it is still possible for one to freely go to banks and exchange the pre-2005 notes. But to me, this chance should be utilized to either make unaccounted cash impossible to exchange (the cash could be usurped and destroyed, if an exchange is attempted – at least 20% of black money thus could be made useless) or make people reveal their black money, by perhaps offering to make it white by levying a 20% tax on the disclosed amount. Without doubt, this is too big a chance to let go off, and especially now since the deed is already half done. Who knows, this act may even end up giving the current government the much needed boost just before elections! Irrespective of what he finally does, one thing is certain, like I said before: Raghuram Rajan is making things exciting, and it need not be great news for the crony capitalists of India!

[B1] DR. ARINDAM ON INDIAN ECONOMY

The BJP must talk of bringing back all the black money stashed abroad and stop corruption

31 January 2014 | Dr. Arindam on Indian Economy

I have written about these earlier too and I think the time is ripe to repeat the same. These are India’s biggest economic issues, yet, despite some voices here and there, nothing is being done about them on a red alert scale. Yes, I am talking about black money and corruption and how our politicians, hand in hand with bureaucrats and businessmen, have placed us at a shameful position with respect to these. If BJP really needs a unique differentiator to convince the electorate, then rather than just focusing on the economic development agenda, they should necessarily spearhead the fight against black money and corruption and not be just another voice speaking against these issues.
I collate out here various statistics that I’ve mentioned in some of previous editorials too, and you’ll see how pathetic India’s situation has become with respect to black money. As per various reports, the amount of black money stashed abroad by Indians is approximately $1450 billion, the largest in the world. If one wishes to compare, this is more than our entire national income. As per the same reports, while India is at number one in terms of the total black money stashed abroad, Russia comes in at the second place (at one third of the black money compared to the Indian figure), UK is at the third position, with Ukraine and China trailing it in the fourth and fifth position. As per media reports, in 1967-68, the black money in India was around Rs 3,034 crores (9% of GDP); this went up to Rs 46,867 crores by 1979 (49% of GDP). You can only imagine how the figures would have grown since then! The oft-quoted and much respected Global Financial Integrity (GFI) in its recent report said that India was the third largest exporter of black money in 2011, with $84.93 billion being exported in 2011. From 2002-2011, $343 billion of black money has gone out from India, as per their report.
Similar is the situation with respect to corruption and scams. While in the 1980s, India saw only eight scams of a significant nature, the 1990s had 26 such scams. The figure now has reached a whopping 150 plus! From animal fodder, coffins for soldiers, or real estate meant for martyrs, to telecom and even sports events like the CWG, wherever there has been a scam, there has been a collusion of the devious political class with bureaucrats and businessmen. In 2010, the late and most respected management guru C. K. Prahalad had said that corruption was costing India Rs. 25,000 crores every year, as per the FICCI-E&Y report ‘Bribery and corruption: Ground reality in India’, corruption cost India Rs. 36,500 crores in the period October 2011 to September 2012. A 2011 study by the research agency Indiaforensic is more shocking, as it puts the cost of corruption to India at Rs.1,555,000 crores in the last decade. Another study I read revealed that 50 million poor households have to annually pay around Rs 9000 crores as bribe to various authorities for getting their work done.
Back to black money, and Transparency International says that a huge 60% of black money generated is directed into the electoral process. And taking advantage of this debauchery by politicians (who get their major source of black money from businessmen), the business class has invested in various surreptitious tax havens throughout the globe! Mauritius, Cayman Islands, Bermuda, British Virgin Islands, select Scandinavian and European countries, and even countries like Thailand, Singapore, Hong Kong and Macau – destinations are innumerable for Indians to park illicit funds.
The example of Mauritius is quite interesting, and one that I quoted in one of my previous editorials. I had written then – and this holds now too – that how does one justify that Mauritius ranks first among all countries in Foreign Direct Investment (FDI) inflows to India while its national income is just around $9 billion, and its investment in the banking sector is just over $1.5 billion? 9,000 plus offshore corporate entities in Mauritius have their roots in India. Under the Indo-Mauritius treaty, and under certain other treaties, a Mauritius company can sell shares of an Indian firm and yet escape taxes as there is no policy of capital gains tax (CGT) in Mauritius.
Quite ironical that when ultra-rich countries like Switzerland, which clearly hoards an astounding amount of black money, are ready to cooperate with India, not many Indian politicians are ready to take that offer up. I think it’s quite understandable why they would not want to follow up! This is unlike the governments of other nations. For example, Germany paid $6.3 million to the LGT group in Liechtenstein and bought bank data to identify tax evasion. In 2009, US forced the Swiss government to give access to 4,450 secret accounts in UBS. Even Nigeria, after 18 years of trying, got back $700 million. So did Philippines ($700 million) and Mexico ($74 million)!
It’s time now for India. Rather, it’s time for the BJP to take the lead in the area of getting back black money and ending corruption. As I’ve said before, the black money lying abroad belongs to Indians; and that it must be brought back. And if corruption is killing India, then the BJP must necessarily punch it down transparently and show the electorate that they mean their words when it comes to improving India. Yes, the economic development agenda is a great one when other things are proper. But when we have two most critical issues that are destroying India with every passing day, then BJP needs to first pull India out of the muck, and then target the sky. If they wished to convince the electorate that they should be the party of choice to lead India, then ending black money and corruption should be at the top of their agenda.

[B2] DR. ARINDAM ON INDIAN ECONOMY

The United Colours of Globalisation!

31 January 2014 | Dr. Arindam on Indian Economy

Truly said, every coin has two sides. But when it comes to policies and politics, a random toss can be really catastrophic. The same can be said for globalisation. Of course, globalisation came with its own set of advantages and disadvantages. On the one hand where it made the world a melting pot, then on the other it also became the reason for the cracks on that very pot – making it fragile and susceptible.
With the advent of globalisation, the concept of nation-state – or rather, shall I say nationalism – gradually started diminishing! The world-order started getting governed more by knowledge and communication technologies. Along with knowledge and technology, the ease of mobility acted as catalyst to make the world smaller, more congested and heterogeneous. So when migration and cross-culture relationships were augmenting each other, in some other part of the world national identities were getting lost. That said, nationalism has the ability to enhance solidarity, but if not channelized under controlled conditions, then it can backfire as hostility and increase xenophobia. December 18 was International Migrants Day, a day when the United Nation’s officially exhorted people and governments to end xenophobia and to support migrant communities. But that’s easier said than done.
Recently, a nation famous for its stringent civilian rules and regulations and subsequently also for its benchmark target of zero crime, saw globalisation and xenophobia at loggerheads in the most unexpected manner, especially given the social history of that nation. A few days ago, hundreds of foreign residents in Singapore resorted to violence, vandalism and even attacked the police in one of the worst riots in the last four decades of Singaporean history, after a bus (evidently accidentally) killed an Indian migrant worker near Little India, a region that typifies India and is populated significantly by Indian migrants. The riots occurred despite the fact that Singapore has one of the most stringent laws for rioters. Without an iota of doubt, accidents are uncommon in Singapore where laws are followed religiously, literally and verbatim. But then, this one incident acted as a trigger to the suppressed animosity that foreign workers were carrying in their minds and hearts since long, due to their perception of being xenophobically (if one could call it that) targeted since long by the Singaporean nationals. This riot seemed more of a frustration emitting exercise by local Asians residing in Little India who are still not treated as par with permanent residents of the island nation.

[B3] DR. ARINDAM ON INDIAN ECONOMY

How patents are anti-poor and are harming essentials like healthcare worldwide

31 January 2014 | Dr. Arindam on Indian Economy

Come Diwali, the greatest Indian celebration, and a considerable number of people all over the country get burns and many die of burn-related injuries. One doesn’t realise the gravity of the situation till tragedy strikes at one’s doorstep. This Diwali, a small diya kept near a staircase, in twenty seconds straight, had my aunt (my brother-in-law and fellow TSI columnist Prashanto Bannerjee’s mother) in its deadly wrap. She, being a neighbour since my childhood, is perhaps closer to me than are any of my real aunts. Despite her saree being made of cotton, and despite my brother-in-law noticing the burning saree instantly and putting off the flames with buckets of water within twenty seconds, she got 65% burns – and at 72 years of age, that is dangerous... very dangerous! When we reached Apollo Hospitals in New Delhi – where we finally admitted her – the doctor told us that if she had been of Prashanto’s age, 36, he would have given her only a 20% chance of survival with the 3rd degree burns that she had. But then, there’s a small background story to all this. Prashanto’s mother was actually taken initially to Max Super Speciality Hospital. To our surprise, we were told by Max doctors to get her admitted somewhere else since they didn’t treat burn injuries… The quick research we did after our visit to Max gave us a shocking statistic. In Delhi, the capital of India, there are only two hospitals capable of treating burn injuries. Other hospitals in fact don’t even admit burn victims! And being Diwali, Safdarjung Hospital, the only hospital other than Apollo for burn victims, was expected to be very crowded. If Delhi has only two, then you can imagine how many hospitals does the average Indian city have that handle burn injuries – none!
Anyway, once she was admitted to the ICU at Apollo and we got talking to the doctor, and wondered how in such a big city such few beds were available for burn victims, his answer shocked us further. He said that a burn injury is a poor man’s injury and ergo didn’t have many hospitals as takers. Before this incident, it had never struck me that this was the case. It should have been quite obvious actually: it is the poor woman – and not really the man – who gets burnt when her saree catches fire from the kitchen stove kept on the floor. And when such poor women get burnt, it matters less whether they survive or not. Therefore, no hospital has been interested in investing in a burn injury center! What was sadder was that when I researched on the net and read about the tremendous advancement of medicines for burn injuries (that have reduced chances of mortality to negligible even in severe burn cases), I realized that we still lived in a country that, despite the spectacular international medical advancements, continues to have the highest number of people dying of completely curable burns.
Apollo, of course, is a very rich man’s place. And they were quite forthright about that – treating Prashanto’s mother would cost up to Rs.90,000 per night, with medicines alone costing up to Rs.60,000 per night. And these are the per day costs of treating a ‘poor man’s injury’! No wonder, a treatment center for a poor man has barely any takers. In fact, even if your nearby hospital were to start a burn injury center, chances are that even the rich man wouldn’t be able to bear the expenses for a two-month treatment, forget the middle income or poor man. And that’s what makes me write this piece on patents today.
I have always been very excited about movements like copyleft (the anti-copyright movement) and have believed that one of the best things that the internet has done is to open the doors to zillions of gigabytes of knowledge-ware to mankind free of cost – from software to top end research studies. And I so hope that patent laws across the world too are drastically changed soon for the betterment of mankind. In fact, in his book called Sex, Science and Profits, Professor Terrence Kealey argues how there is absolutely no need to give patent rights to anyone for 30 years, when in reality the costs of research studies with high profits can be recovered back in three years on an average. By exploiting such a mindless number of years of patent rights, companies fool us on the costs of research and rob the poor worldwide of their dues. Not just that, unduly long-term patents keep essential medicines extremely expensive and away from the reach of the poor – and patents also additionally slow down innovation. Every technology and formula kept patented for 30 years consequently means there would be much slower progress on further extensions to that technology or formula due to the patent-gifted monopoly. History is evidence that the moment the patent right over a technology has concluded, the progression on that technology has become extremely fast compared to the past years of hardly any innovation – like in the case of the steam engine.
It’s time that we come up with a humane formula for deciding the number of years that companies can be granted patent rights – or we cut the patent protection period drastically short to suit the interests of the world and especially its poor, instead of keeping patents mindlessly favourable towards the rich corporations and their profits. And while the time period of patent rights for every other sphere can still be debated over, in the arena of medical sciences, this must be changed with immediate effect. Additionally, policies similar to the Indian National Pharmaceutical Pricing Policy 2012 – which puts a cap on the prices of 652 popular medicines – must be notified with an immediate effect and should necessarily be expanded to include not just life-saving high cost patented medical drugs, but also high cost medical treatments and operations.
In the meanwhile, as Prashanto’s mother fights a brave battle on her 30th day in hospital – thanks to one of the few beds on Diwali night we could pay for, while many other not so fortunate souls couldn’t – friends, when anyone you know of goes through an unfortunate fire accident and gets burnt, remember this: just rushing her to the nearest hospital might be of no use – for it’s considered a poor man’s injury for which your nearest hospital, even if it’s a Max, may have no treatment facility.

[B4] DR. ARINDAM ON INDIAN ECONOMY

How WTO is anti developing nations!

31 January 2014 | Dr. Arindam on Indian Economy

The era of colonialism is over. However, exploitative trade practices by First World countries against poor nations are still alive and kicking. Overly biased import policies by richer nations, who weave a complex web of tariffs and duties, set the tone of discrimination against Third World countries.
For instance, Bangladesh-made garments entering the US market are slapped with duties and taxes/tariffs that are in general 20 times higher than those that UK-made garments have to face. Similarly, imported Indian garments have to face import tariffs of around 19%, as compared to the 0-1% charge applicable on European and Japanese garment imports. Such discrimination debilitates the value additions made by producers belonging to poor countries. According to internal estimations of Brazil, its agricultural exports’ earning has reduced by more than $10 billion because of trade barriers in the West. For Mozambique, exports to EU are lower by $100 million a year because of restrictions that are almost equal to the total amount of financial aid it receives.
‘Free trade’, as advocated by WTO, is nothing but a myth. Richer nations, led by United States, spend a billion dollars a day in extending subsidies to their farmers. The figure is six times the amount of aid they provide to the poorer nations. These domestic subsidies extended by rich nations to their farmers work in two ways against poor nations. First, these subsidies act as export barriers for poor countries – as their generally low priced produce becomes relatively costlier in the export market. And second, the surplus produced in the rich nations, because of the protection and supportive subsidies, is dumped easily at lower prices in developing countries, thus putting the local producers in these poor nations out of business.
The discriminatory and potentially catastrophic policies pursued by developed nations are usually endorsed and even backed by WTO. The deals struck through the framework of WTO more or less protect the interests of the rich countries while turning a blind eye to poorer nations – one reason why the November 2013 WTO General Council Meeting turned out to be another big failure, with members failing again to agree on a trade deal.
WTO has also failed miserably in its promise of fairness and justice. Despite its commitment to improve access to its expensive legal system and make it easier for poor nations to file suits, nothing much has been done. In the last one and a half decades, no African nation could file a suit or was a complainant; merely one ‘less developed nation’ filed a claim. In a paper titled ‘Is WTO Dispute Settlement System Biased against Developing Countries? An Empirical Analysis’ by Fabien Besson and Racem Mehdi of University of Paris, the authors write, “Within the context of trade disputes increase, the position of developing countries draws special attention. There is evidence that developing countries have a disadvantageous position in the WTO DS system. Park and Panizzon (2002) provide statistical documentation of the WTO disputes initiated between 1995 and 2001. Roughly one third of WTO disputes (80 out of 235) have involved developing countries as plaintiffs, which is slightly higher than their share of disputes initiated under the GATT period. On the other hand, developing country defendants have been the target of roughly 45 per cent (109 out of 242 disputes) of WTO disputes, which is much higher than was the case under the GATT. Most developing and all the least developed countries have not used the system even once since its inception, whereas the G4 countries (EC, USA, Japan and Canada) are over-represented.”
In addressing Blue Box subsidies (unfair trade subsidies in rich countries), which directly contradicts the vision of WTO, no timetable has been finalized by the organization to decide its fate. The stubbornness of EU and US in holding onto their stands is made easy by passive (and sometimes even active) support of WTO and other global economic bodies. The EU’s refusal to offer anything beyond its Common Agriculture Policy, which is an already agreed reform, demonstrates the attitude of the Western nations towards the developing ones and highlights the helplessness of WTO in resolving unfair trade practices pursued by the West. Despite the WTO’s stand for free trade, EU, Switzerland, Norway and Japan have been able to protect their so called ‘sensitive products’, with no voices raised against them by the organization.
To be fair, not many global forums or organisations have been able to uphold their founding motives and core objectives; still, WTO is one that leads the list of such organisations. Instead of bridging the gap between two worlds, it is exactly doing the reverse. WTO, through its policies, is only facilitating the process of rich nations growing richer at the cost of the growth of poor countries. Fundamentally, its allowing the West to gain economic and political control over the developing and underdeveloped world. The era of colonialism begins, again!

[B5] DR. ARINDAM ON INDIAN ECONOMY

Making Macau out of Andaman and Lakshadweep!

31 January 2014 | Dr. Arindam on Indian Economy

While I was contemplating what to write in this week's editorial, James Packer was publicly announcing his plans to invest $400 million for a casino resort in Sri Lanka. In a speech at the Commonwealth Business Forum in Colombo, he said that his casinos would act as ‘‘a leading tourist mecca for the rising middle class of India, China and the rest of Asia.’’ Without a doubt, Packer has got his figures worked out pretty well. Despite a domestic ban on gambling, Indians do illegally indulge in various forms of gambling and betting every year. Some reports suggest that the size of the domestic gambling and betting 'industry' could be beyond $60 billion a year; and this is not counting the amount Indians spend abroad in casinos and betting centres. However, most of these instances are not in public view and are virtually impossible to track. Here is where the government needs to make smart plans to exploit the benefits of both the worlds. Going by the way India wishes to increase tourism, and perhaps even minimise the number of Indian tourists going abroad (to save foreign exchange), the authorities need to seriously consider setting up domestic gambling centres as these could give quite a significant impetus to tourism revenues, given the lessons that are there to be learnt from Vegas, Macau and Singapore. Can ‘Incredible India’ and mini-Vegas, for the sake of argument, exist at one place? I am not advocating that India adopts gambling blindly – given the negative connotation the word exudes – nor am negating the social malaises that gambling might bring, but am simply pointing out that the government should at least review the undeniable global correlation that exists between GDP growth and setting up legalised gambling and betting centres within the country.
If the worry is that legalising gambling in India could increase social exploitation, one could explore setting up of such centres in stand-alone territories like Andaman and Lakshadweep islands, test out the initial waters and economic benefits, and depending upon the experiences and lessons learnt, open up more centres in other states. Opening highly regulated casinos in such stand alone territories may actually give a huge boost to employment and lifestyle in these regions.
Las Vegas is a case in point. Thanks to gambling, Las Vegas today has an impressive employment rate and low tax burden. Similarly, legalising gambling turned the odds in favour of Mississippi. In another case, Tunica – one of the poorest counties in the Mississippi delta – today boasts of a low unemployment rate, low food subsidies and low state welfare expenditure. Even during the slowdown, in the year 2010, the American Gaming Association confirmed that gaming services contributed almost $125 billion to America’s GDP, apart from providing 820,000 jobs and raking in close to $49.7 billion from tourists. As per the Casino Association of South Africa, casinos have contributed 143 billion rand to South Africa’s GDP since being legalised in 1996.
Macau, one of the most-sought after gambling hubs in the world, has seen itself growing at light-speed! The province not only has seen a surge in employment and lifestyle but has seen a huge increase in per capita income, which today stands at around $78,000 – 10 times the average Chinese income and notches above the average American income. And this didn’t take centuries to happen. It literally happened overnight. Macau is well-connected to China via water, air and land and witnesses around 80 million Chinese visiting this province, spending over $100 billion every year. Today, by various estimates, the revenues earned by Macau is six times that of Vegas. The Statistics and Census Service confirmed recently that the region’s quarterly economic growth was propelled by an 8.5% increase in exports of services, specifically gaming.
However, amidst all nations, one nation that has exploited the benefit of capitalism, yet kept socialism intact is Singapore. It is a classic case of ‘Happy Capitalism’. The nation today has some of the world’s largest casinos and generates revenues close to what Vegas generates, but has been successful in keeping the social malaise out of the system. On the one hand, the island nation invited two of the world’s biggest casino companies to open gaming resorts in the nation, and on the other, it formulated laws that kept the doors of the casinos closed for its own people. The nation has strict rules for Permanent Residents (PRs) with respect to gaming halls and casinos. Locals are usually discouraged from entering these halls and are heavily prosecuted in the case of a breach of law. The Singapore government, does however allow locals to stay inside a casino for 24 hours straight on the payment of S$100 (Singaporean dollars) or have multiple entries per year on the payment of S$2000. At the same time, the government of Singapore also regularly educates casino operators about discouraging locals and has released mandates for creating ‘virtual walls’ between locals and casinos. Notwithstanding that, civil servants and bureaucrats in Singapore are prohibited from entering casinos and gaming centres. Bureaucrats having an annual pass for entry into casinos need to regularly submit detailed logs describing their visits to casinos.
A statutory board called the Casino Regulatory Authority of Singapore (CRA) is responsible for administration and enforcement of the laws as laid down by the government. They ensure that no one (including tourists) below the age of 21 years is allowed entry into the casinos; the operators under no circumstances extend credit limit for the PRs; no automated teller machines (ATMs) are installed within the casino premises; problem gamblers are stopped from entering the gaming halls. Moreover, with the setting up of the National Council on Problem Gambling (NCPG), families can get their family members banned from entering casinos. Even families of adult foreign students studying in Singapore can apply for such bans on their wards. As of last count, around 90,000 people have been banned on individual requests while another 1500 have been banned on family request. And of course, any citizen who has filed for bankruptcy is by default banned. Additionally, no direct casino advertisements are allowed in any form. Taking it steps ahead, the government has banned opening of any independent casinos; only resort-casinos are given licenses to operate.
Looking at the Singapore example, why can’t the Indian government invite international casino giants to open integrated casino resorts in Andaman and Lakshadweep and convert them into the Macaus of India? Like I mentioned above, it would not only increase tourism but would also encourage tourists visiting south-Asia to alter their itinerary and add India to their travel plans. However, like Singapore, there should be strict rules in order to keep locals and Indian nationals away from gambling, or there should at least exist structured caps on betting amounts, depending upon income and family approval of Indians. But under no circumstances should such resorts be replicated in the hinterland and under no circumstances should locals be allowed to enter casinos regularly. With Kazakhstan, The Philippines, North Korea and Taiwan, planning to do a Macau themselves, it would be a bad bet to for India to not explore this potential opportunity!

[B6] DR. ARINDAM ON INDIAN ECONOMY

Agriculture needs more holistic reforms

31 January 2014 | Dr. Arindam on Indian Economy

“While, like last year, I seek the blessings of Lord Indra to bestow on us timely and bountiful monsoons, I would pray to Goddess Lakshmi as well. I think it is a good strategy to diversify one's risks,” are the words of the ex-finance minister (and now President) Mr. Pranab Mukherjee during his budget speech for the year 2011-12. The statement is symbolic of the unfortunate ways in which our ministers have been keener on invoking Gods and Goddesses rather than depending on science and technology and straightforward ground level solutions to come to the rescue of India's dwindling agriculture sector, which employs around 50% of India’s workforce, but is decreasing in its contribution to the GDP year after year. “As per latest estimates released by Central Statistics Office (CSO) the share of agricultural products/Agriculture and Allied Sectors in Gross Domestic Product (GDP) of the country was 51.9 per cent in 1950-51, which has now come down to 13.7 per cent in 2012-13 at 2004-05 prices...” This statement of Minister of State for Agriculture Tariq Anwar last month in a reply to a query in the Rajya Sabha shows the pathetic downfall of a once glowing sector. Even in absolute terms, India’s foodgrain production declined to 250.14 million tonnes in 2012-13 from 259.32 tonnes in 2011-2012.
What continues rising in this sector is just the number of farmer suicides, which reached a shameful figure of 15,440 in 2012, close to 50 farmer suicides every single day of the year, as per the National Crime Records Bureau. The government itself admits that since 1995, more than 300,000 farmers have committed suicide.
Leaving aside our pseudo-intellectual ministers, it’s more important to understand the real problems of agriculture. At the farm level, the usual suspects are clearly the ones that are addressed the least. The acreage in India has been around 140 million hectares, but with the number of farmers increasing, the divisions in land have resulted in decrease in productivity and diminishing economies of scale, what to say about reduced financing options and killing debt traps. Apart from this, lack of irrigation, warehousing/cold-storage facilities, and an almost non-existent technology support from the government also are critical issues for farmers, pushing them towards destitution.
But what takes the cake in the whole value chain is something else. Every year, like an annual event or an Indian festival, vegetables and agri-products find themselves in a comedy circus. On the one hand, our government boasts of record yields, whereas on the other, this so called hollow boast of ‘record yields’ fails to reach its real customers. Think about it – as per the government, we’ve had one of the best monsoons this year. The Central Water Commission confirmed in August 2013 that our water reserves nationally are now at an ever-high level in a decade. We’re apparently experiencing a bumper crop year. Clearly, such a claim is laughable when you consider the rising prices of fruits and vegetables all around.
SubmitBut then, isn’t that the case every year? Every year, onions, tomatoes and other essential food items find themselves being upgraded from basic necessities to luxurious items. And the chief culprits for this and the related obscene price rise are hoarding and black marketing. However, despite repeated offences by traders and recurring problems of agri-products pricing, not much heed towards agriculture reforms at the ground level has been given. Unlike other nations, agriculture in India is still treated as a child of a lesser God. Take for instance China. After 1994, the government of China introduced policies that limited the amount of grains that could be imported (giving a boost to domestic production). This brought the domestic farmers to the centre stage and increased the domestic supply of crops. In 1995, a policy named “Governor’s Grain Bag Responsibility System” was incepted, which made the local governors accountable for supply and demand and also for maintaining the prices in their jurisdiction. Later, by the end of 1997, China introduced agricultural industrialisation management strategies for professionalising the flow of produce to the market and morphing the entire agriculture system into a market-oriented system. The next in the line was balancing production in urban and rural areas, wherein urban industries were asked to facilitate agriculture and guide rural farmers for better yields. The reforms didn’t end here.
Comprehending the need for sustainable development and long-term progress, the agriculture reforms included compulsory rural education, financial security, internationalisation of farming and market openness. As I wrote in one of my previous editorials where I compared India and China, as per a World Bank study, an Indian farmer contributed $400 to the agriculture sector back in 1994, which increased to $500 by the end of 2009 (a mere increase of 25 per cent); while a Chinese farmer increased his contribution by 85 per cent and is currently adding $550 to the sector. Going further, the Chinese government has definite and clear-cut policies to check food inflation, price rise and hoarding. All big traders are provided with guidelines to report to the authorities within 24 hours if they decide to increase the food prices by 4 or more per cent. Moreover, criminalising unethical activities, the government has provisions of imposing penalties on those cartels (especially for traders dealing with flour, rice, noodles, cooking oil, milk and gas) that are found influencing prices. The fine can go upto a million yuan and imprisonment. Besides all these reforms, China also adopted land reforms to allow every farmer to own his land for agriculture and exposed their farmers to scientific and technology-oriented farming. This is evident from close to 10,000 agricultural patents that today China owns compared to around 50 by India. In a similar tone, Argentina allows its authorities to freeze prices and imposes fines and imprisonment in case of any breach.
Contrast this with India. The conviction rate under the Essential Commodities Act, 1955 and the Prevention of Blackmarketing and Maintenance of Supplies Act, 1980, was only 2.47 per cent in 2009, 3.55 per cent in 2010 and 6.68 per cent in 2011. While unlettered Indian politicians exclaim that the rise in prices will benefit the Indian farmer – without realising that the Indian farmer is still selling at the minimum price only, while the so called ‘benefit’ is being gained by the hoarder and final retailer – others can’t even make up their mind on whether export bans should be put in place to rein in prices. In 2011, an onion export ban (that was put in place because of rising onion prices) was lifted in ten days flat by a committee of Empowered Group of Ministers, led by – no surprises – the then finance minister Pranab Mukherjee. The situation is quite similar even now. On August 13, 2013, Food Minister K. V. Thomas said, “We would wait for 10 days and if the prices do not comedown, would ban exports,” Minister said. On August 23, 2013, just ten days later, he said, “Currently there is no proposal under consideration to ban the export of onion... Prices of commodities including vegetables like onion and tomatoes are mainly governed by market forces of demand and supply, cost of transportation and storage, weather conditions etc.” But then, where’s the ground level action against hoarders that should have been undertaken days, if not weeks ago?
Increase in onions prices is just an indicator of several malaises that are floating seamlessly in our agriculture system. For a start, the agriculture ministry should immediately take steps to introduce stringent laws against hoarding, publicly arrest hoarders and initiate action against them, and open the market further for agriculture produce. After all, here we are talking about policies that are not for a few crore farmers but for the entire nation and for the larger good of the economy and society.

[B7] DR. ARINDAM ON INDIAN ECONOMY

Private Equity: The double-edged sword!

31 January 2014 | Dr. Arindam on Indian Economy

When it comes to Private Equity (PE), there can be numerous schools of thought. You have the group that would completely go gaga over PE. You have another that would simply want to wipe off this infatuation from the market. There is also one that would hold PE responsible for failed, inefficient and weak government policies. In India unfortunately, what we have (mostly) seen so far is the havoc that PE has caused. And I clearly see it as one key reason that has snowballed into the economic crisis that we face today.
It was back in 1946 when PE emerged in the American market in its true sense. The era between 1960s to 1980s saw the Vanderbilts, Whitneys, Rockefellers and Warburgs build fortunes in businesses ranging from real estate construction projects to airlines, banking to whatever moved on the streets of Silicon Valley. Running parallel and equally fast was Warren Buffet, who through Leverage Buy-Outs (LBOs) acquired one corporation after another. The US Congress then opposed every change in tax policy that could have made life more difficult for PE firms (the Carter Tax Plan of 1977 was the first of such acts that failed to be enacted). What followed up until 1990 was quite understandable (given the quick, sweet success PE had witnessed in its early years). Thousands of PE labels mushroomed across the globe.
But beneath this rolling of the Red Carpet was a weakly-constructed foundation. Cracks on the PE wall first became visible in the first half of the 1990s. Ills related to the massive rise in leveraged buyouts that were financed by junk bonds led to the-then collapse of the LBO industry. Amidst various companies that went into a tailspin was a big name – Drexel Burnham Lambert. This one company that was credited for the boom in PE back in the 1980s had several allegations made against it. The firm was charged with insider trading and had to file for Chapter 11 in 1990. Thus, one of the founding pillars of PE was turned to dust. Companies and markets across the globe experienced a similar avalanche.
The ‘true’ global effect of PE became more publicised and shamefully dramatic in the early 21st century. It began with the dot-com bubble bursting. This disaster has so far caused the maximum damage because it sent more than just tremors across the global financial market. It shook the very belief in Private Equity (and Venture Capitalism). In the quick years that followed this early 2000s disaster, more than half of PE firms that had invested their dimes and coffers in web start-ups were forced to throw in their towels. Of course, the market as a whole, and the investors were left at the mercy of no modern capitalistic gods. Many IT firms that had become bigger with the prime support of PE saw the cash and asset balance levels in their wells fall. Much below even the amount of capital initially invested! And the biggest reason for such an unwanted outcome was that those very PE firms that had promised to fuel their dreams ran out of fuel themselves. They backed out in the name of retreat and failed to live up to their investment commitments. By the end of the year 2000, globally, the count of PE firms fell by a horrific 50 per cent!
Obviously, India was not one to remain idle when it came to being mesmerised by this hypnotic trick and believing in the permanent magic of a volatile formula. It was one of those markets that felt the maximum impact of the dot-com bubble slap. The Indian IT industry came under huge pressures – returns vapourised for some time and much hope was lost. There are huge apprehensions still – that have spread to other verticals. Even today, every now and then, cases of insider trading and embezzlement are reported across various sectors. And we’re not even counting unrevealed scams yet. Private equity dealings in the first decade of the 21st century has left us in ruins. Worse, during this period, PE entered one sector after another and that resulted in excess supply being created. The bubble of a hope that PE generated ruined organisations far and wide – some temporarily and some forever – with excess pressure of expansion that has left them in a complete mess with visible supply-demand mismatch.
Take for instance the case of the much-hyped – and one that still finds fanatic believers – industry (in India) called Real Estate. Real estate was once considered an immovably strong and non-volatile sector. Then came PE intervention, and left the industry in a shambles. It’s one heck of a mess you cannot just ignore. Back in the 1997-2003 period, withdrawal of funds by PE led to a crash in Mumbai region’s real estate business. The same was repeated in the 2011-2012 period when prices of real estate properties fell by 20 per cent (and higher) in Delhi and Mumbai. The fundamentals of the entire sector have seen a paradigm shift after the SEZ Act of 2005. Most residential and commercial concrete jungles that were built post-2005 were aimed towards investors who wished to park their money in real estate properties. Ghost towns were being built all around the metros and bigger cities, and were sold at prices that were headed for the moon. [Forever it seemed.] What is the present scenario? When PE investors decided to stop funding such ‘(not-so-)concrete’ dreams by cutting off the supply of money, the expected came to pass. Empty malls, vacant residential properties, half-completed high rises and incompletely dug up construction sites with building material left untouched for months is a common sight. Not many souls move about in such ghost towns these days! How PE has totally tricked buyers and sellers in an entire industry is an incredible story to be told. But not one to gain inspiration from.
Holistically stated, the purely economical repercussions of PE’s entry and exit across sectors and markets have also led to several socio-economic crises. In a 2011 study by the University of Chicago, Harvard Business School and the US Census Bureau, it was proved that “companies tend to terminate more employees after a buyout compared to competitors in the same sector.” “After a PE buyout, employment in existing operations tends to decline relative to other companies in the same industry by about 3 per cent. Many of those job losses are undoubtedly painful,” writes Prof. Steven Kaplan, the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, in a 2012 article titled, ‘How to think about Private Equity’. But PE investments always offer higher returns given the risks. Right? Actually, no! In a 2005 study by Prof. Steven Kaplan of the University of Chicago Booth School of Business and Prof. Antoinette Schoar of MIT, covering the period ranging from 1980 to 2001, it was revealed that, “Investors actually made slightly less on PE deals than they could have by investing in an S&P 500 Index fund.”
All in all, PE funding not only degrades and makes a sector volatile but also injects malpractices into companies. Thought leaders have not been very vocal about it, but in the West, film-makers have tried to depict the same through their works. Today, PE funding worldwide is headed southwards. And that is good news. It implies greater stability for the global economy as a whole. A more sustainable future, if I may add. In the last one decade or so, PE ownership across companies has reduced by leaps.
Going back where I started, when it comes to PE funding, there are several schools of thought, but when it comes to India, the thought that PE can and will leave you in ruins appears most logical. The Indian government has to be very careful going forward about the manner in which it allows PE to enter any given sector – whether it be for the sake of developing Greenfield projects in the most undesirable of sectors or for the sake of lighting a bulb in the most underdeveloped of villages.
PE is a double-edged sword. Popular perception is that it makes you stronger – but only until you measure the blood you have lost. Period!

[B8] DR. ARINDAM ON INDIAN ECONOMY

Gold reserves of India can make India a golden bird again... at least economically!

31 January 2014 | Dr. Arindam on Indian Economy

Many may not be aware, especially in our part of the world, that back in the year 1933, on April 5, US President Franklin D Roosevelt signed one of the most controversial orders in American economic history. The Executive Order No. 6102 criminalized the possession of gold by individuals and corporations and forbid “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.” This order was an extension of the Presidential Proclamation No. 2039 that criminalized the hoarding, possession and ownership of gold or bullion, and imposed a monetary penalty of $10,000 (equal to more $170,000 in today’s value) and imprisonment for as long as ten years on individuals falling foul of the law.
Obviously, such laws on hindsight look very undemocratic and politically suicidal; but then, if one were to explore it and go beneath the surface, the big picture may gradually get vivider. In tough economic times, gold and similar forms of monetary elements can become a key source of increasing money flow in the market. One should remember that most nations (including ours) have at one time or the other even printed money based on the amount of gold kept in the federal bank (Reserve Bank of India, in the case of India). In other words, hoarding of gold by communities, corporations and individuals not only decreases the flow of money (given the unproductive capital locked within such hoarded gold) but also to a large extent disturbs the supply-demand equilibrium of gold and bullion. Before I reach India, let me in brief discuss the way Uncle Sam tapped (or as many critics would say, exploited) the Executive Order No 6102. The order forced every American citizen to surrender all their gold, leave 160 gms, to the Federal Reserve in exchange of a fixed amount of money. After receiving most of the gold, the US government increased gold prices manifold, thus churning out a huge amount of profit, which was used for the Exchange Stabilization Fund (ESF), a fund that enables the American government to control currency exchange rates. In 1964, the previous laws were modified and the ownership of ‘gold certificates’ was legalized, followed by the legalising of gold trade in 1974 – after almost three and a half decades.
The importance of and aspiration for gold ownership in India requires no introduction. Despite economic turmoil, the consumer demand for gold is up by 51 per cent in Q2 2013 while the demand for gold bars and coins is up by 116 per cent. As per various unofficial estimates, more than 60,000 tonnes of gold are lying idle in the form of jewellery and ornaments all across the nation. Going by the current price of gold at the rate of Rs.35,000 for ten grams, this unaccounted reserves could create a possibility of reaping about Rs.2,10,00,000 crores in money supply! Going by World Gold Council figures, Indians hold 20,000 tonnes of gold (which is an absurdly less figure, as a single temple in South India holds more than 1000 tonnes of gold); even considering this reduced figure of 20,000 tonnes (which is 33% of the unofficial estimates), the amount we’re talking about would be nothing less than Rs.70,00,000 crores! Against these jaw-dropping numbers, what looks hilariously minuscule is the state of RBI. Despite such huge national deposits of gold, RBI has an official reserve of a mere 550 tonnes of gold, compared to 1000 tonnes of China (which is again debatable) and 9000 tonnes of US.
The Government of India should immediately draft and announce a Central Gold Bond scheme, where it should ask people to deposit their gold with the government in lieu of Central Gold bonds at a fixed rate of interest of around 9%. One reason I mention this percentage is because in my calculations, I have realised that despite the huge surge in gold price, in the last 65 years the same has increased by only around 9% per annum compounded. With respect to the government’s gold bond scheme, people should of course be allowed to take back their gold after say a period of 15 years. The same will be applicable for temples, trusts and other similar institutions; for them, the government could even make it compulsory to deposit all gold and make hoarding beyond a limit illegal. These institutions should be thankful that the government is not nationalizing their gold hoardings, given the immense employment generation potential this money can have. Thus, a huge percentage of gold in physical form would be directed to the Reserve Bank, which, in turn, would utilise the same to increase the money flow and to adjust the exchange rates of our currency. Similar schemes have been in the past practiced by many European and African nations, with the latest being Venezuela.
This one scheme would serve several purposes. Firstly, it will make the INR stronger, subsequently boosting international trade, especially our mandatory imports; because, with the INR getting weaker, the cost of doing cross-border trade is increasing and the old deals signed at old exchange rates are becoming infeasible to continue. Secondly, it will create huge employment opportunities if the money so sourced is invested honestly in infrastructure or for energy generation/oil production and other such extremely key needs of this country. The money thus minted should only be used for employment generation and entrepreneurship, which eventually would increase jobs in the market and would spirally improve the flow of money further. Thirdly, the entire process of converting physical gold to paper gold would decrease the incidents of gold smuggling and gold hoarding and above all make all gold possession transparent.
Apparently, as of now, it is impossible to even estimate the amount of gold lying inside our nation; and most of these gold hoardings have evaded taxes too; as even today, domestic consumption of gold is not through authorised outlets but through trusted local gold traders. In such cases, tax-evasion is a cake-walk.
Such schemes would obviously invite criticism, but when the economy is going through tough times, the political corridors need to take some tough and non-populist steps. The only apprehension that I see here are scams and corruption. Even an iota of embezzlement would create a dynamo effect and ruin the entire economy and social harmony. In such a situation, the entire execution needs to necessarily be politically independent and under a body such as CAG or Supreme Court with everything being tracked electronically and centrally. The fall of INR to Rs.68.80 per dollar is a matter of utter shame, especially after luxuriously introducing an expensive sign for rupee! After all, as they say, looks can be quite deceptive!

[B9] DR. ARINDAM ON INDIAN ECONOMY

There is nothing called a Free Trade Agreement!

31 January 2014 | Dr. Arindam on Indian Economy

In a recent comment, the Gujarat Chief Minister Narendra Modi expressed grave concerns on the outcome of a little known Free Trade Agreement (FTA) that the Indian government is hastily attempting to sign with the the European Union. His concern was that the impact of this proposed EU FTA on the domestic dairy and animal husbandry industry in India would be debilitating if cheap European dairy products supported heavily by EU subsidies get inroads to Indian consumers. His fears are not unfounded. Indeed, if top European multinational dairy brands like Lactalis, Friesland Campina or Arla Foods with turnovers of $12.7 billion, $11.2 billion and $8.7 billion respectively get access to the Indian market on the backs of zero or minimal import duties, India’s biggest dairy brand Amul (Gujarat Cooperative Milk Marketing Federation) providing livelihood to more than 1.5 crore dairy farmers in rural India might not survive for long. True, Nestle, one of the world’s biggest food products companies, has definitive footholds in India – but Nestle India has entered India through the FDI route than the FTA route, it purchases products significantly produced within India, provides massive employment in and around production plants built in India, even though its holding company is the Nestle S.A. Of course, Nestle too would be advantaged by the proposed EU-India FTA, but it’s a different ballgame when EU-government subsidised products are imported directly from Europe with little entry barriers. Digest this figure. In February this year, the EU 2014-20 budget was announced. Of the 960 billion euros budget, a mammoth 38%, or 363 billion euros, was allocated purely for farm subsidies, which will without doubt make EU farm and dairy products ridiculously cheap compared to Indian products which any way suffer from massive cost additions due to various infrastructure issues. If these are the things to come, then the so-called ‘Free’ Trade Agreement could well turn out to be our costliest trade agreement.
The EU-India FTA discussions caught steam back in 2008. However, because of the sensitivity of the issue, the progress had been shrouded in utmost secrecy with little or no data available. Of late, the discussions progressed more, so much so that the Prime Minister, Dr. Manmohan Singh, even came out with a surprisingly strong statement in July 2013, “We have entered into Comprehensive Economic Partnership Agreements with the ASEAN countries as well as the Republic of Korea. We are hoping to conclude a similar agreement with the European Union soon”. Most political parties are silent on the issue despite the fact that the implication of such an agreement is enormous. An FTA generally means the lifting of trade barriers and an unhindered flow of goods and services with minimum import duties, intellectual property rights, government procurement, and competition policies between the nations bound by the agreement. So, if the EU-India FTA gets signed, then one could well imagine world class corporations like IKEA and Carrefour competing with domestic brands at prices that are cheaper than those of domestic products! Can our indigenous brands compete with these behemoths? Since any FTA encourages direct imports, it is not a natural builder of employment, rather a reducer of the same, as over time, domestic industries shut down giving way to cheaper imports. Thus, it is ridiculous to tom tom the point that FTAs eliminate poverty and help the destitute with a better living; they clearly don’t do that.
Various reports mention how FTAs in Senegal in 1990s led to employment cuts by 30-35 per cent, especially in the manufacturing sector. Similar trends were observed in Sierra Leone, Uganda, Sudan, Ghana and other African nations. Due to the influx of foreign goods, the domestic industries and markets in these regions either collapsed or never had the minimal support to even start.
In the year 2000, EU and Mexico signed a so-called ‘Global Trade Agreement’, which was trumpeted as the beacon of development and economic success. As per the agreement, Mexico had to deregulate 95 per cent of their goods and services industries in order to allow foreign goods into their markets. However, within three years post-GTA, Mexico’s GDP growth was crawling at 1 per cent, with their trade deficit touching a figure of 80 per cent. The rural-urban employment gap got wider, thus creating lot of social and local tension in the region. Eventually, the quality of basic goods deteriorated and created an oligarchic market where the access to water and electricity became tough and inaccessible to the poor. Mexico destroyed employment, domestic trade and became a nation that is today being tormented both economically and socially. Still, Mexico currently has FTAs with around 44 countries. Significantly due to this, they were one of the hardest hit during the economic slowdown, wherein their GDP plummeted by more than 6% during 2008-09. As per economic surveys, the poverty level on absolute terms has gone up from 35 to 46% during the period 2006-2010. Of course, the rich in Mexico have become richer during the same time.
Indian FTAs are leading to similar results only. A joint study by Corporate Europe Observatory and FDI Watch slammed the proposed EU-India FTA. The authors of the study mention, “The EU and the Indian government have handed the negotiation agenda over to corporate lobby groups, ignoring the needs of their citizens. It is an outrage that two of the world’s biggest so-called democracies should behave in this way.” And the issue is not just limited to dairy and agricultural products. A paper titled ‘India-EU free trade agreement – should India open up banking sector?’ concludes the following, “The proposed India-EU trade agreement is likely to further constrict the access to banking services in the country, geographically, socially and functionally... The provisions in FTAs are likely to further destabilise the financial system and so make future crises more likely.”
Médecins Sans Frontières (MSF) wrote an open letter to the Indian Prime Minister last year drawing attention to “specific harmful provisions in the proposed intellectual property (IP) and investment chapters [of the EU-India FTA], that if included would have serious implications for access to affordable medicines in India and throughout the developing world.” Similar have been the arguments of global aid agencies like Oxfam, Stop AIDS Campaign, Health Action International (HAI) Europe and Act-Up Paris who protested against the EU-India FTA outside the European Parliament in April 2013.
An April 2013 paper by Indian automobile industry body SIAM on the EU-India FTA mentions, “Opening the [automobile industry] to imports/lowering import duties under the EU FTA is a retrograde step and will have a severely damaging and long term irreversible effect in several ways for the Indian economy, auto industry and consumer at large.” Similar are the statements of other industry bodies like CII, FIEO etc which are strongly cautioning the government against signing FTAs. India signed an FTA with Japan in 2011. Imports from Japan grew by over 3 per cent to $12.5 billion in 2012-13, while our exports to Japan fell down to $6.26 billion from $6.32 billion one year ago. India signed a free trade agreement with ASEAN nations in 2009. Look at the economics since then. India’s trade deficit with the ASEAN group has increased to $18 billion in 2012-13 from $14.9 billion in 2009-10. Is it any wonder that in the year 2012-13, India’s current account deficit reached a historic high of 4.3% of GDP? We cannot afford to continue with these FTAs which are not only destroying employment and domestic industries, but also are devastating our foreign exchange reserves, one reason the rupee has now plummeted to record lows (and was Rs.61.86 per dollar on August 7, 2013, a never before seen low).
When it comes to poverty reduction, the world doesn’t really require such hollow and lopsided policies like FTAs, rather what we require are fairer wealth distribution policies. Today, the wealth accumulated by the hundred richest persons in the world is enough to end global poverty four times over! Shockingly, the wealth of the top 1 per cent has increased by 60 per cent over the last two decades and was not even affected by the last financial crisis. And there is every likelihood that any FTA-driven Indian economic growth, if at all, would be a jobless one, and might not be sustained in the long run. We don’t need FTAs with other nations to increase their wealth; we need poverty reduction policies for our people; and the government should realise this at the soonest.

[B10] DR. ARINDAM ON INDIAN ECONOMY

SEBI's claims on Sahara start crumbling in Supreme Court, as TSI predicted

31 January 2014 | Dr. Arindam on Indian Economy

In April this year, I had written on how various points in a 2012 Supreme Court judgement against the Sahara Group on the basis of an earlier SEBI order were clearly erroneous and went against even Constitutional Acts. (Read the article here http://www.thesundayindian.com/en/story/the-unputdownable/25/47189/). I had titled the article ‘The Unputdownable!’ as an appreciative sobriquet for Subrata Roy Sahara, the Sahara Group Managing Worker, who, despite various attempts by external entities to pull him down – the English media in India included – has come back with exemplary credentials.
First the background to this case and on the face-off that Subrata Roy Sahara has had with SEBI, and in this I liberally refer to my previous article. The Sahara group, which has issued OFCDs (Optionally Fully Convertible Debentures) since the year 2001 with all relevant government permissions, and which has regularly submitted all details as required by the concerned government authorities, suddenly got a prohibitory order from SEBI in November 2010 against the OFCDs issued by two unlisted group companies (Sahara Housing Investment Corporation Ltd. and Sahara India Real Estate Corporation Ltd.) – and this despite the fact that just seven months before that, SEBI had, through its own communication to Ministry of Corporate Affairs, commented that as these were unlisted companies and had not filed a draft red herring prospectus with SEBI, any complaint with respect to these two companies should be handled by the Ministry of Corporate Affairs.
Of importance is the fact that the Ministry of Corporate Affairs, in its written submission to the Allahabad High Court in 2010, mentioned, “The issuance of OFCD [by] the petitioner company after the registration with the Registrar of Companies has been permissible under law. The Central Government remains the regulating authority for the company.” Similar were the notings of the Additional Solicitor General, Mohan Parasaran (who is now Solicitor General), and of the Minister of Corporate Affairs, Veerappa Moily.
True to its past, SEBI disregarded all this and brought out an order against the two Sahara companies in June 2011, demanding that they immediately pay back all the moneys collected through OFCDs, with due interest.?After subsequent hearings in the Securities Appellate Tribunal, finally in August 2012 in the Supreme Court, the two Sahara firms unfortunately again received the short end of the judgement, where the judges asked Sahara to pay back the OFCD moneys with interest. The fact is that a few of the statements within the August 2012 Supreme Court judgement seemed to be wrong.
For example, referring to the hard copy of investors’s details that Sahara had handed over to the court, one of the Supreme Court judges said that one of the introducer/agents mentioned in the hard copy, a man named Haridwar, apparently couldn’t have had that name. The judge wrote in the order, “Haridwar, as a name of a person of Indian origin, is quite uncomprehendable [sic]. In India, names of cities do not ever constitute the basis of individual names. One will never find Allahabad, Agra, Bangalore, Chennai or Tirupati as individual names.” It took me all of five minutes to put paid to the Supreme Court judge’s contentions. For example, typing Haridwar on Google got me to Dr. Haridwar, much awarded erstwhile Director of DRDO, Ministry of Defence.
Also, the judges weren’t clear on how much money was in contention. While one of the Supreme Court judges giving the order on Sahara believed that the OFCD money collected by two Sahara firms was around Rs.27,000 crore (“Saharas have no right to collect Rs.27,000 crore from three million investors,” Justice K. S. Radhakrishnan), the other judge believed that the amount collected was around Rs.40,000 crore (“What the two companies chose to collect through their OFCDs was a contribution to the tune of Rs.40,000 crore,” Justice Jagdish Singh Khehar).
Not only that, the Supreme Court’s August 2012 judgement wrongly gave powers to SEBI much beyond the SEBI Act, and directed SEBI to attach “all and any bank accounts” related to the two companies in case the two Sahara firms fail to comply with the orders. But as per the SEBI Act, SEBI can attach only those bank accounts “or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made there under...”; also, the bank accounts could have been attached for only a month as per the Act.
The Supreme Court order resulted in SEBI moving ahead and attaching not just the movable and immovable properties of the two companies involved, but also of other group companies (and this point about other group companies anyway wasn’t mentioned even in the Supreme Court judgement). SEBI’s mindless drive to attach accounts and properties of other group companies of Sahara and of shareholders goes not just beyond the SEBI Act, but beyond the very basis of capitalism and the distinction between group entities and between shareholders, that the Indian Companies Act clearly defines.
The Sunday Indian was the first and till now perhaps the only media house that came out vociferously against this stupendously faulty move of SEBI. As a basic tenet of capitalist business, no sensible investor would ever invest in an Indian company in case SEBI and the Indian courts start transgressing the clear line that demarcates a company’s incorporation – giving it a definitely independent legal status as compared to its group companies and its shareholders.
In my earlier article, I wrote how our respected finance minister spoke that we cannot have rich promoters and sick companies, and that banks therefore should start acting against promoters in such cases. Amusingly, if banks extended this rule to the government’s loss making companies like Air India, the Rashtrapati Bhawan could well be attached any time soon.
But that’s what SEBI decided to do against the Sahara group post the August 2012 Supreme Court order. They made a plea to Supreme Court on July 30, 2013, strongly requesting the Supreme Court to act against Subrata Roy Sahara for not following the earlier Supreme Court order, and that too simply because he is, as per SEBI, a shareholder holding a 70 percent stake in the companies. This is despite the fact that Subrata Roy Sahara is not a Director in those companies, and he cannot be held legally liable. In other words, what SEBI wishes the Supreme Court to enforce is that from now on, any significant shareholder of any company can be indicted for the company’s shortcomings. In other words, if you hold a significant number of shares in Unilever, and if there’s any court order against Unilever, you might as well get ready for SEBI’s Chairman Mr. U. K. Sinha pulling you up to pay on behalf of Unilever. I consider this behaviour of SEBI similar to kangaroo court proceedings.
SEBI also pleaded to the court that the Sahara Group was a single economic entity and any group company’s commitments were liable to be paid by the other group companies. Clearly, this line of argument is exactly what is wrong with SEBI’s understanding of modern day capitalism. And in a brilliant turnaround, the Supreme Court judges refused to accept SEBI’s contention. “...The other [Sahara Group] companies have not given any [such] undertakings,” Justice Radhakrishnan commented, while Justice Khehar flatly questioned the SEBI counsel, “Each of these [Sahara Group companies] are individual companies; to what extent can we proceed against their assets?” The SEBI counsel, having no plausible reply as of then, said he’ll argue the point later.
One should also note that SEBI pleaded in the Supreme Court that Sahara Group’s newspaper advertisements berating SEBI and bringing out SEBI’s clear misrepresentations, amounted to contempt of court. To this, the bench, after studying the advertisement in contention, amusingly replied to the SEBI counsel, “This is not contempt [of the court]. The expression used in the advertisement is for you.”
In conclusion, all I can say is that while the August 2012 case against Sahara seemed to be completely against the laws of natural justice, Parliamentary Acts and Supreme Court mandates, the recent reconsideration by the Supreme Court of a few critical issues that have the potential to destabilize the tenets on which capitalism is based – in other words, the protection provided to shareholders, and the fact that group companies cannot be held responsible for other group companies financial issues – is an extremely positive step and one badly needed to rein in the so-called market regulator which has suddenly become obsessed with lynch-mobbing Subrata Roy Sahara and his group of companies.
As I had written in my previous article, while Subrata Roy represents the other India, what I call Bharat, the English media just can’t handle the trust this other India holds in him and his Sahara group of companies. It is time we start changing such a mindset and ensure that capitalism and capitalists are not punished purely because one market regulator decided that they could make the rules and break them whenever they wished. And this change has to be initiated by the Supreme Court at the earliest.

[B11] DR. ARINDAM ON INDIAN ECONOMY

The need for credit expansion in India

31 January 2014 | Dr. Arindam on Indian Economy

India had been one of the fastest growing economies till early 2011. For almost half a decade before that, along with China, India was clocking over 8 per cent GDP growth annually and talks among analysts were ripe that India, along with its neighbour, would spearhead Asia’s rise in the new world order of the 21st century. However, things have gone awfully wrong for us ever since! The growth rate has kept plummeting, ebbing now at less than 5 per cent in the previous financial year; even till date, there is little light at the end of the tunnel. Two of the foremost reasons for such bottoming out are dried up investments and a rising current account deficit, which are becoming worse with each passing year as the burden of the global slowdown becomes heavier. While our current account deficit has reached a record 4.8% of GDP in FY 2012-13, as per a recent chamber of commerce report, new investment proposals from domestic and foreign entrepreneurs have dried up by 75% as compared to the previous year. As compared to 2,828 investment proposals in the fiscal year 2011-12 worth Rs.6 lakh crore, the figure in FY 2012-13 was 697 proposals worth Rs.1.4 lakh crore.
Ever since the liberalization era of early 1990s, Indian lawmakers had been obsessed with foreign investments and foreign capital, as if foreign companies were the panacea for our economy and ultimate messiahs to move our economy forward. And hence, the potential of our domestic capital and investments was thoroughly ignored. The domestic financial infrastructure in terms of developing an indigenous credit market was given a cold shoulder and all policy weight was put behind attracting foreign investments. Critics were silenced with the argument that emphasis is given on FDIs and not FIIs – as the latter had been a major catalyst for the infamous South East Asian economic collapse back in the late nineties. Our policy advisers, who are mostly accustomed to aping tried and tested economic doctrines instead of formulating something that is country specific to India’s economic environment and culture, couldn’t see the danger lurking. As global recession set in to full effect, the automatic depletion of FDI was a foregone conclusion. And as we had been over dependent on foreign investments – and thus had kept our indigenous credit infrastructure half-baked – there were no defenses against our economy flattening!
If we had created world class banks and financial institutions earlier on, then we would have been saved from depending on the troubled overseas banks of United States and Europe that are themselves on the deathbed. A sound domestic financial infrastructure would have had a cascading effect on our exports, as our products and services would have been far more competitive in global markets, both in terms of quality and price. And most importantly, India could have arrested the flight of capital that goes along with foreign investments. The socialists and communists in India have tried to have their voice heard in this aspect – but the prospect and promise of employment generation going hand in hand with foreign investments, which our protective economy was struggling with, had the last laugh. However, with all due credit to Manmohan Singh for what he envisaged with economic liberalization, the cliff could not be foreseen. The fact that employment generation, at the cost of capital exodus, might not be sustainable over the long run was largely ignored and put onto the backburner. With requisite capital infrastructure and capital base in domestic markets, the wealth created could have been retained in the country and later ploughed back into our economic system to create a progression of investment expansion and a growth of the economy.
The maturing of a robust credit market will not only minimize the risk of future financial precipices but also will boost money flow and harbour an entrepreneurship boom in the economy, apart from employment generation of a sustainable kind, and an overall income level boost throughout the economy. Only domestic credit markets can ensure the growth of small scale to medium scale entrepreneurial ventures, which are the true saviours of any economy, rather than large scale global enterprises. A 2010 United States International Trade Commission report confirms that 99% of US businesses are SMEs (Small and Medium scale Enterprises). Another OECD report confirms that more than 95% of OECD corporations are SMEs accounting for 60-70% of employment. Unfortunately, SMEs in India, as per various reports, contribute only around 17% to India’s GDP. Clearly, as such business ventures swell, apart from direct beneficiaries, like employers, vendors and dealers, a host of related livelihood options will crop up into the scene. And wealth thus created by these ventures will add to the multiplier effect to foster a holistic socio-economic lift.
And that’s exactly what Japan did in the post war recovery period and what China is doing today. Both these countries were impoverished when they started their economic rise and both had limited domestic natural resources, apart from having dense
populations. Japan focused on the Keiretsu banking model, which was as unique and Japan specific as possible. The huge domestic conglomerates of Japan rose primarily on the pillars of this banking model that insulated them from the risks of capital market fluctuations. Each of these multinationals had and have small shareholdings in these banks that allow them to coordinate with policy makers on banking policies as well as expand the productive capital base under the system. The Keiretsu was successful because it was built on trust and nationalism, factors which had a triumphant drive in post war Japan.
China, too, has been developing its credit market at an astonishing pace. In 2012, the Industrial and Commercial Bank of China (ICBC) dislodged Bank of America from the number one spot, in terms of Tier-1 capital, to become the biggest bank in the world. The country today can boast of four out of the top ten banks worldwide. Not a small achievement for a country that was impoverished just a few decades ago! And what is most prudent is that instead of deregulating these banks, the Chinese government is backing them tooth to nail by maintaining ownership of their equity. That is because they realized the importance of wealth retention and the pivotal role this plays for sustenance of economic growth over the long term. This policy measure is not only domestic but can be outbound as well. Chinese ventures in Africa and other developing countries that are fetching billions of dollars directly and much more through covert influence of foreign economic policies, couldn’t have been possible without such an advanced credit infrastructure. Therefore, not only is the Chinese economy largely insulated from foreign upheavals, they have also been the benefactors for many others with their own capital.
Indian policy formulators should be well advised to build a homegrown financial infrastructure at par with the best in the world, if they have to leverage the domestic investment environment and expansion of domestic economic sectors. In the short run, even micro-credits should pave the way for small ventures, investment and job creation. Technological imports can also be financed domestically to create joint ventures and halt the looting of profits by foreign enterprises. If Japan can create Keiretsu and China can model their credit market based on local dynamics, India can do it too with ingenuity and uniqueness. The virtue required for that is to shed the baggage of mental dependency on foreign models and instead focus on developing local monetary constructs, processes and world-class banking institutions. That will shape India’s future in a better way than anything else can.

[B12] DR. ARINDAM ON INDIAN ECONOMY

Let India follow Infosys... and Murthy shows the way!

31 January 2014 | Dr. Arindam on Indian Economy

The poster boy of Indian entrepreneurs of the 21st century, Narayana Murthy, is back in business at Infosys – the third biggest Indian tech firm – with a renewed mission to reverse the slide that had happened in his absence. Of course the economic slowdown had its own role to play, but the Infosys slide has been mainly engineered by a rising attrition rate, probably because of eroding values of employee welfare; values that were initially laid down by Murthy himself. The catchword of ‘employees first’ resonating with equal importance to ‘customers first’ was pioneered in India by Infosys, not just as a business strategy to foster higher revenues but also higher happiness levels of its workers. You can call it altruism, but trust me, despite some new-age philosophies preaching against this construct, it is better than the ‘me only’ capitalist doctrines. Even the heartland of United States that was built on the ideals of ‘survival of the fittest’ and showed little sympathy for those who couldn’t make it, has been eventually forced to acknowledge the pain, frustration and miseries of the weak as was evidenced through the Occupy Wall Street campaign and President Obama’s second term.
Barack Obama is often castigated by the Conservatives and media for being a socialist, and hence labeled as weak – a typically stereotyped capitalistic prophecy – only to find out that the overwhelming middle-class voters are behind him, despite his belonging to a racial minority. That’s leveling scores of socialism with capitalism, which many thought is indispensable. Without any doubt, capitalism forms the backbone of almost any economy; and centrally-controlled government planning or equal wage distribution based on principles of communism alone cannot take a country far and on the path of being economically prosperous. But an equitable distribution of wealth is as much important in an economy as ‘wealth creation’ per se is. And Narayana Murthy understood this perfectly, an understanding that set the standard for ESOPs in Infosys. He distributed Rs.50,000 crores among his employees and made all of them shareholders of Infosys. Even when he founded Infosys with his and his wife’s savings, in a first ever in India, he made his top employees top shareholders of Infosys, making many multi-millionaires. That’s socialism at its best – upholding dignity and ownership from the topmost to the lowermost in a flat employee structure. But that doesn’t mean he did not pursue capitalism – Murthy created wealth through capitalism and prudently distributed it to his people as an exemplar of socialism. His motto of following capitalism in his mind and socialism in his heart was thus fulfilled. Truly, this set the pattern for many others in similar businesses; and Indian entrepreneurs, at large, now follow his exemplary principles as Murthy showed that it is possible to build a business empire with socialist values.
If it can be done at the micro-level of a firm, is it impossible to do the same at the macro-level of a country? Although the picture of an economy is more complex than that of a firm, clusters of firms do make an industry, clusters of industries do make a sector and sectors do make an economy. Countries like China, Brazil or even Japan are live examples of more or less successful economies based on the capitalist model but with a socialist face. And that is where India made a mess of it. After liberalization in 1991, India’s economic policies attempted to mimic those in Western economies and thus wholeheartedly were capitalist in nature. Even though factors like labour laws, tax breaks of primary sectors, farmers’ subsidies et al still have the socialist bend, our focus has still been completely redirected towards wealth creation at the expense of the interests of the labour class and farmers. Consequently, the primary and secondary sectors have been largely neglected, leading to a lopsided growth trajectory. The divide between India and Bharat hasn’t been more conspicuous, with a rapid flux of rural migrants flocking into the streets of the metropolises, forced to live in the most inhuman conditions to make their living.
The question remains: why are people of hinterlands forced to migrate in the first place? Even in capitalist states like United States, the geographical distribution of wealth is much better than is the case in India! The Human Development Report (HDR) brought out by the Indian Planning Commission (in the year 2011) admitted that Indian wealth distribution is highly skewed, contributing to an ever increasing gap between the rich and poor. A research carried out by the government affiliated Institute of Applied Manpower Research (IAMR) on the indicators of consumption expenditure, education and health revealed that the top 5 per cent of all households in India represent 38 per cent of assets while the bottom 60 per cent represent only 13 per cent. The gap is more vivid in urban centers where the lower 60 per cent of households account for just 10 per cent of wealth. The sustained neglect of agriculture and manufacturing sectors has had its cost, with farmers and casual labourers being at the base of asset possession classes. India’s Gini Coefficient, a factor that measures wealth inequalities, is at a precarious 0.669 as compared to China’s 0.550 and Japan’s 0.547 (the higher the coefficient – which varies from 0 to 1 – greater is the inequality between the rich and poor). China, for instance, is a classic model of taking the best of capitalism and socialism. It opened up its economy in 1978 to ensure a spur of capitalist ventures, domestically as well as from outside; yet, their policies kept control of the investment patterns geographically and of their effect on various social groups. China has, till date, kept the core industries under government control; and even till date, around 41 per cent of the industrial capital is held under SOEs (state owned enterprises). Contrary to the travails gifted by Indian economic policies, there has been much public sector growth in China in various strategic industries – like oil, coal, telecom, transport and equipment.
Chinese public sector firms are making their presence felt even in non-strategic sectors like textiles and paper, and are literally spread out in every nook and corner of the nation. They have proved that SOEs can work and make profits and can even compete with multinationals; whereas in India, we have given up the prospect of depending on public sector undertakings hands down, ever since foreign investments crept into our system, leading to the previously mentioned lopsided growth, along with rising stress and reducing happiness levels in our society. Further, agriculture reforms have been utterly neglected with little emphasis on modern farming techniques and micro-finances to farmers, forcing them to migrate to urban centers looking for menial jobs. Often tagged as the long term cure for an economy, China’s spending on education is many light years ahead of us. While in 2010, China spent $12 billion in funding universities alone, India’s corresponding budget was limited to $860 million. In emerging economies, India’s literacy rate is one of the lowest among the countries with high social spending, like China and Brazil, which are quite a distance ahead of us. While India’s literacy rate is pegged at 73 per cent (which too is quite questionably high a figure), China’s rate is hovering around 94 per cent and Brazil’s at 90 per cent. In healthcare too, India’s sordid story continues – Russia spends $1043 per capita (5.6 per cent of GDP) in purchasing power parity terms, South Africa spends $930 (9.2 per cent), China $347 (5.1 per cent) while India languishes at $124 (4.2 per cent) – being at the bottom of the table here as well.
Thus, India’s empathy deficit on welfare of the masses has been a major hurdle to its economic progress. It doesn’t, however, take away windfalls of economic growth that lifted as many as 200 million out of the poverty rut in the last two decades and created a landscape of neo-middle class that has been a potent engine for our march forward. Still, poverty is relative and the increasing gap between the affluent and underprivileged is bound to create an undercurrent of resentment and deep-down frustration in India’s socio-economic paradigm. A soothing effect of an evenhanded wealth, income and growth spread – a la the benchmark of Infosys – can leverage long-term sustainability and accountability of our progress graph. As the vision in Infosys percolated from the top, so should our Prime Minister roll down a humane economic model and breed a culture that is just and compassionate. Narayana Murthy ensured that biased and partial appraisals of his employees were checked at all cost. As ups and downs are part of life, the underperformers in our society should be given a fair chance to redeem themselves. India’s socio-economic mores should inculcate similar values and the drive has to come from the top. Unfortunately, we are moving away from the vision of Mahatma Gandhi who taught similar principles of life – a mad rush towards growth, revenue, profits and bottom lines alone is not going to produce a just and happy society. It is time enough that our main political parties realize the importance of India’s social wellbeing alongside its economic advancement.

[B13] DR. ARINDAM ON INDIAN ECONOMY

B13Why innovation alone can save Indian brands

31 January 2014 | Dr. Arindam on Indian Economy

The opening of the first Starbucks outlet in South Mumbai in October last year triggered quite some frenzy among Mumbaikars, with long queues of venti-mocha-frap verve translating into a major rock concert hysteria. And it was all for a coffee shop! Imagine the burst of marketing energy from Starbucks to take advantage of this excitement. Within five months of opening its first outlet, four each were opened in Mumbai and Delhi (taking the footprint of the coffee chain to nine outlets in India). It reminded me of the kind of madness that was witnessed during the launch of Pepsi and the relaunch of Coke in India, way back in the early 1990s. Here’s the simple truth – our craze for foreign brands has never ceased, despite our progress in almost all dimensions of socio-economic parameters. Why? Because as a nation, experience has taught us that our brands have never quite had the gumption of American, British, European or even Japanese brands. The halo was and is missing. This lack of unique proposition in our brands is due to the shoddy products and services offered in the name of Indian brands!
In this new age of globalisation, our brands need to compete globally and not just nationally. In the past, so many Indian brands – from the Ambassadors to the Vimals – were whipped and almost but sent off packing when foreign brands came knocking. These foreign brands piggybacked on their global popularity and our lack of expertise due to substandard innovation. If India has to reverse the ongoing trend of the influx of foreign brands into its market, it has to invest on innovation on a large scale, and frame and implement comprehensive policies to support innovation.
The low count of patent applications that is filed in India is some warning. In 2011, only 42,291 patent applications were filed in India. China on the other hand saw 526,412 applications being filed – highest in the world that year, followed by US with 503,582 applications (source: World Intellectual Property Indicators 2012, released by the World Intellectual Property Organisation; December 2012). In the Global Innovation Index (GII) ranking 2012, India stood at a dismal 64th – two spots below where it stood in 2011! Shameful it is that India, in terms of GII ranking is last amongst the BRICs. No wonder, a June 2012 Standard & Poor’s report revised its outlook for the Indian economy and warned that India could become the first amongst all BRIC countries to lose its sheen! [The S&P report was titled, ‘Will India Be The First BRIC Fallen Angel?’] It is disheartening to observe that despite Sam Pitroda’s efforts to pump life into India’s innovation machine, and PM Manmohan Singh’s call to promote India as an “Innovation hub”, the country is still largely seen as a “screwdriver nation”, only capable of assembling together parts of foreign-branded products.
It is true that a fish rots from the head. That is precisely the reason for India’s innovation lag – because our policymakers never bothered to roll up their sleeves for the cause. There is hardly any constructive policy in place to encourage innovation in the country. This year, our prime minister announced $880 million towards upgrading our innovation books, which he termed as a “game changer”, but then no concrete holistic innovation policy was either drafted or designed!
China moved ahead steadily but surely to achieve its innovation goals. It started by adopting foreign technologies and became competitive globally on the manufacturing front through price undercutting. When ‘Made in China’ products began to taste success, it rightfully moved on to the next level of innovation. In its 12th Five Year plan (2011-2015) the country has categorically stated that it would encourage indigenousness and innovation to replace FDI with investments made by homegrown industry. China is on a systematic path of progress to achieve technological, operational and marketing superiority. A few decades back, China was no more a developed nation than India. In fact, it was far behind on the development scale. The country began with manufacturing products on assembly lines; and today manufactures global brands! Today, it boasts of a number of globally respected brands like Lenovo, Haier, China Mobile and many others. In fact, it is only an outcome of working on and reaping the fruits of innovation that three of the ten largest Global Fortune 500 companies today are Chinese! Today, there are as many as seven Chinese brands in Forbes list of 100 most innovative companies, as against just two of India.
Look at Japan. The country carried an image of being a copycat up until the 1950s. When Japanese products entered Western markets for the first time, consumers in the West laughed in the face of the Japanese brands. Why? The Japanese products were shoddy, poorly designed and carried malfunctioning engines. However, persistent investments over decades that followed – by the Japanese government in Science & Technology (and R&D and innovation) – saw the country rise on the innovation barometer. Today, Toyota, Honda, Canon, Toshiba, Panasonic, Nikon, Sharp, Suzuki, Bridgestone, Fujitsu, Yamaha, Sony, Nissan and many other Japanese names are brands that every consumer is proud and happy to own – whether American or Japanese! What is noteworthy is that the Japanese were unabashed about following the American model of innovation. And this was emphasized in their official policy that their model of innovation was based on US model – a country that had always been the king of innovation for the last 100 years.
Our on-the-rocks brands coupled with the colonial hangover, have given Indian consumers a Western complex that is too difficult to shed. This syndrome has affected most Asian and African nations in the past. But unlike many other countries (say Japan, China and South Korea), India has not been able to overcome it. Our movies run well when they feature foreign locations; are considered apt for class audiences when Western culture and habits are shown – even the usage of foreign brands apparently lifts a movie to a higher class. Our music, our restaurants, even our economic policies and our education are blindly aping the West in the belief that everything of theirs is superior to ours. A Hollywood movie today is incomplete without a GM or a Chevrolet or a Marlboro or a Starbucks, unlike ours where the lead actors are seen flaunting foreign commodities!
In contrast, take the example of South Korea and Taiwan. Both were impoverished in the aftermath of the Second World War, but through their self-belief and aggressive government policies that were pro-innovation, today, they can boast of some of the hottest brands in the world. The emphasis of research concentration and R&D forms the cornerstone of their ability to produce world-class brands like Samsung, Hyundai, Kia, LG [all four are Korean], HTC, Acer, Asus, Transcend [all four are Taiwanese] and many more.
Innovation shapes economies. There is many an example that proves it. The problem is not that India did not realise this truth in time. It was that the country relied too much on foreign investments and ignored the potential of homegrown entrepreneurs. Yes, there are aberrations on the radar – like Infosys, L&T and Reliance. But these are too few to mention or feel proud about. Most critically, these big brands are also finding it very uncomfortable to survive with the Western helping hand! Today, there is no Indian automobile company that can produce a vehicle that in true sense can be called an Indian innovation. There is virtually no Indian company that produces a ‘truly Indian’ brand.
India would be biting the bullet if it depends too much on foreign brands to lift itself out of the current rut, instead of encouraging indigenous innovation. Encouraging innovation and entrepreneurship are the only two failsafe ways in which policymakers can pump growth into the Indian economy. There is much talent in India available to make our country an innovative powerhouse over the next decade – if not in the next few years. Our higher education system should incorporate the spirit and knowhow of innovation and entrepreneurship in its curriculum so that a new bunch of young entrepreneurs come up and take the world by storm, just the way the Japanese and the Koreans did... and the way the Chinese are doing today. India is not unrecognised. Its brands are. India today has got confined as a nation of service provider rather than an innovator. Ironically, we are the most sought-after nation for IT and IT related services but have miserably failed to come up with products at par with Apple or Samsung. What we need today are not branches or manufacturing units of Intel, BMW or Microsoft but an Indian answer to Cisco, Bell Labs, Ford, Apple or GM! Our innovation policy should encourage completely indigenous innovation rather than encouraging reverse engineering or smart compilation. There is an urgent need for a breath of fresh air in our economy to turn the dull table around, instantly!

[B14] DR. ARINDAM ON INDIAN ECONOMY

Are you still a moron advertising in newspapers?Are you still a moron advertising in newspapers?

31 January 2014 | Dr. Arindam on Indian Economy

The Economist, in an unbelievably futuristic cover story titled Who killed the newspaper, way back in 2006, had written that the last American will throw the last piece of newspaper into the dustbin by the year 2050! I trusted The Economist and its Intelligence Unit’s researches far too much to outrightly reject its forecast, but surely had thought that that would be crazy, since I came from a family where I grew up seeing my father read about a dozen odd newspapers daily; and us reading the leftover pieces – because, after he had finished reading a newspaper, it would be full of holes due to his cutting out various articles. He had a wall-sized cupboard with hundreds of drawers with articles on every possible topic in the world... well-documented and stored alphabetically. So naturally, The Economist piece set me thinking about the ramifications for and of a world without newspapers, echoing the line of thinking of my father that after all, newspapers were where we got our knowledge, and even education from. Newspapers are a significant pointer to the literacy of a nation. After college, intellectual and world-class columnists like Swaminathan and others, from newspapers, contributed to expanding my knowledge pristinely – you can imagine the respect all this embedded in me for the institution called the newspaper! So I was in a state of semi-disbelief and doubt for the past few years, post reading that cover story. But it all changed, slowly...but surely.
It all started changing around 2009 to 2011! As everyone knows, we were one of the country’s biggest ad-spenders till 2012! But interestingly, our returns from newspaper advertising started dropping sharply from 2009-2010. The first year, the admission applications we received from students due to our newspaper advertisements dropped to 40% of the levels we had in 2008-09. The next year, the same was 25% compared to 2008-09 levels. And finally in 2011-12, our applications from advertisements were, hold your breath, just 5% compared to 2008-2009! So basically, in three years, our returns from newspaper advertising came down by a mind numbing 95%! The question you might ask is, did our admissions also come down as much? Thankfully not! Yes, like the economy in general and the education industry in particular, the downturn did affect our business, but that was by a far lesser margin compared to the sharp decline in our returns from advertising! So how did we manage to stay afloat despite the disappearing returns from newspaper advertisements, you might wonder? But before that, let me tell you what we went through as we saw these sudden and massive drops!
The first year, our typical reaction was to straightaway blame the recession and not our advertising strategy. After all, those were newspapers which made us a brand and got us all the students in all those years! So newspapers were never to be questioned! The second year was when we actually started thinking, was there something going wrong with the management education sector? But such a huge drop just due to recession and lack of demand for management education? It was tough to believe! By the third year however, realisation had started to dawn upon us and we realised that newspapers as a means of advertising had not only become a thing of the past in the developed world, but also in India! Especially if you wanted to target the youth, or actually anyone born after 1980 for certain! None of them is reading newspapers anymore! So how will this segment see your ads in the first place and how will they pick up your application form? Yes, that’s the hard fact! Newspapers globally have tried to shift focus from serious content to entertainment and lifestyle in a desperate attempt to cling on to young readers! But alas, naked bodies and titillation are far more easily available and in greater variety on the internet and such a strategy of newspapers has failed worldwide to keep youngsters attracted to them! And India has been no exception, despite the most colourful of peepshow supplements taken out by all newspapers across the country!
In the UK, as per a report by FT, a typical street of 100 houses used to keep 140 newspapers a day in 1950! Then of course TV happened, and then internet! In 2010, a street of 100 homes was keeping only 40 papers! Take another statistic. In 1998, advertisers spent £2.4 bn in newspapers and only £19.4 m online. The same now is expected to be £1.7 bn in newspapers and a whopping £4.7 bn online!!! That’s how the world has changed, with newspapers around the world closing down or being on the verge of closing down. India will be no exception either. Media, especially print, is an investor’s nightmare! Yes, I know I started a magazine business in 2005 hardly knowing what lay ahead; and as the world’s most revered newsmagazine Newsweek goes purely online, I know that sooner or later, we will too and so will magazines worldwide, and thereafter newspapers!
The question then is, how did we survive? The bigger question is, what should advertisers do? Well, we survived because of my wife! Too often, we men fail to give enough credit to our wives! But then, in my case, she is too sharp to ignore! Around the time that we sat down to write our book Thorns to Competition, she kept showcasing researches on how internet is the future, how traditional advertising is dead, how it’s the social media that people care about, why today’s youth hates newspapers, why if you want to get to the youth, you must be on the sites they love... etcetera. You see, wives are tough to ignore! Thus, despite my questioning attitude over the past three years, we shifted more and more to online advertising (of course, Thorns to Competition got filled with perspectives of online being the future of marketing and for giving thorns to competition)! And kept getting increasing returns. I remember that more than two decades back, the erstwhile Hindustan Lever had started demanding from newspapers details about the exact returns on their advertising investments – that is now the most beautiful part of advertising online. Online, every player charges you for a genuine click on your ad and not for fake hogwash! Finally, I can say for real that gone are the days when one would say that “50% of advertising revenues are useless; the only problem is, we do not know which 50%”! Today, advertisers across the world, thanks to Google and the likes, can say that they know exactly how each penny spent gave them returns! And that’s why I call Google a media house! And I pulled them up in one of my recent edits to be responsible for the content they promote and throw to their users (http://www.thesundayindian.com/en/story/right-to-dignity-is-far-more-important-than-freedom-of-speech-and-google-must-stop-acting-innocent/46819/).
You might be wondering then, what about the world and education? What about tomorrow’s generations? Well, again my wife sorted it all out for me! She stopped reading newspapers quite sometime back. Initially, after reading the papers in the morning, when I would ask her her views on something that I had just read, I used to get disappointed that she hadn’t read the news; I even used to joke of her as being utterly ignorant! Slowly and steadily, I realised that the joke was on me! Because in a household where knowledge is the key competition, she would ask me my views on certain things she was reading online, and I started looking like a fool. What she was reading online was far more than what I was reading in the newspapers! Worse, it was all far more relevant to her! While I was getting only one page of relevant news from a 24 page newspaper, she had subscribed to hundreds of papers and sites that gave her completely focused and far more relevant news as per her choice every morning on her iPhone! So with the internet, the world surely is in safer hands! It’s time for us to realise that nobody is really reading newspapers, well almost; and newspapers will give no returns! If you want your advertising to pay back, shift to the internet – that’s where the youth is and that’s where the future of your business is. Of course, you might need to give an occasional, necessary ad or two in the newspapers to cater to the older generation and perhaps for brand building! And as for knowledge? That is in no danger of disappearing; and no, the next generation will not grow up to be illiterates! However, yes, your business may not be able to cater to the next generation unless you realise that you are a moron to be still advertising in newspapers!

[B15] DR. ARINDAM ON INDIAN ECONOMY

Invest in R&D; else, the Rs 2.03 lac crore allocation to defence means more corruption!

31 January 2014 | Dr. Arindam on Indian Economy

With the 2014 general election staring us in the face, the Finance Minister, Mr. P Chidambaram, presented a budget that resembles a financial bulwark for the masses – but where defence, like others, has been a casualty in the bargain. India had always been an important export destination for weaponry and defence equipment, areas which were monopolized by USSR during the greater part of the Cold War. Even after many entry barriers were removed allowing Western nations to penetrate the Indian defence market, the lion’s share of the defence pie continued to be controlled by Russia – a trend that is still as much in vogue as it was yesteryear!
And this budget gave India all the more reason to continue the said trend – a glimpse of which is displayed every year during our Republic Day celebrations where our government showcases the country’s military might as tableaus in front of the entire nation. This year, most of the defence weapons displayed were either imported or were assembled using the parts imported from countries across the world. In short, our tableaux were in fact a virtual display of Russian or Israeli military power!
A defence budget of Rs 2.03 lac crore is certainly good news for India but not good enough for it to rejoice because the procurement model itself is fraught with enormous opportunity costs. Plus, the factor of corruption that is being uncovered every now and then in various deals adds to its limitations. General V. K. Singh’s deliberations can be only the tip of the iceberg as there can be more than a few skeletons in the closet. The beginning of the long line of defence scams started with the Bofors scam in 1987 that involved an alleged kickback of Rs.64 crores – an astronomical figure in those days – for the purchase of the Swedish 155mm howitzers. The Barak missile scam in 2006 that had a deal amount of $169 million was tainted by the accusation that the government went ahead with it despite opposition from the DRDO. The coffin scam in 1999 was another blot with cases filed against army personnel and American contractors. And finally, the much publicized Tatra truck scam in 2012 where a kickback of Rs.14 crore was offered – as claimed by Gen V.K. Singh – and subsequently rejected.
For India, having offshore defence deals will only add on to the import bills without concurrent, meaningful, economic advantage. Neither will there be any technological advances, nor would there be any R&D development that could have taken India towards the finishing line of technology optimization. At present, India is ranked 11th in the world in terms of defence spending, with the currently budgetary allocation for defence standing at an impressive Rs. 203,672 crore, enough to make it an enduring market for foreign investment. This magnanimous figure disguises India’s miserly attitude towards indigenisation of the sector. Surprisingly, our government readily trusts foreign private players for defence equipment but finds it tough to create a pool of such manufacturers back home.
Ironically, in spite of being the largest importer of defence equipment since ages, India still has not understood the importance of indigenised defence manufacturing. On the one hand, India alone accounts for 12 per cent of the total global arms trade, whereas our spending on defence R&D is a meagre 2 per cent of global expenditure, compared to 70 per cent by US and 16 per cent by China! Worse, this spending worth peanuts on R&D has not increased since decades. This is not only baffling but also quite worrisome.
Globally, the trend is the opposite. Nations, due to economic meltdown, are cutting down their total military expenditure but have not axed their spending on defence R&D; rather, they have shifted a part of their capital expenditure towards such defence R&D. An inevitable hallmark in the case of defence manufacturing taking deep roots within the country would be sustained employment generation. Already, certain tie-ups – like Tata group with Sikorsky Aircraft and Mahindra Group with BAE Systems – have raised the bar in the defence sector as they involve production of defence equipment in India. If this becomes a viable model, then India’s yearly procurement expenditure of $13 billion on equipment and services can be dragged down drastically through indigenous modelling. Direct interventions in R&D and technology development are critical to nurture the nascent industry.
Back in 2006, I had mentioned how even after two and a half decades, DRDO had failed to come up with an indigenous version of the MiG-21 (which anyway has been described variously as a ‘flying coffin’). The sorry state of our defence manufacturing is clear from the fact that even today, most of our police officers, especially in small towns and cities, are provided with pre-World War II weapons to counter Naxalities and Maoists who attack using semi-automatic machine guns. Interestingly, the mightiest weapon used during the Kargil war was also imported. And why not, every single import gives an opportunity for a scam or embezzlement. Mind you, whatever warfare equipment we are sold in general is actually obsolete or is two to three generations old; the latest ones are kept exclusively by the exporting nations for their own use; a use that is obvious!
Even from the perspective of geopolitics, this is the most opportune time for India to dash ahead with defence reforms. The cross-border tension with Pakistan is at an all-time low in nearly two decades; and like never before, US is sympathetic to India’s stand in negating the threat from China. This comparative smooth passage of time regarding the threat perception from neighbouring countries gives India extra bandwidth to push for reforms and be self-sufficient.
It should take a cue from China, which till 1998 had policy similar to that of India’s; but that nation changed its defence focus dramatically, and as of 2010, boasted of 15,000 plus patents in the defence industry – up from just 313 in 1998! This remarkable shift has taken China to the threshold of catching up with Western powers whereas India is still decaying in the ‘technology-denial’ mode. Similarly, US has virtually merged NASA with its defence research in order to manufacture state-of-the-art defence tools, unlike India, where the DRDO works with no coordination with the so-called defence manufacturers. Merely allocating lakhs of crores to defence would only promise a newer series of corruption scandals, to say the least. What our FM and defence ministry needs is a sense of budget planning, wherein they must allocate a major pie of our defence budget towards indigenous manufacturing and R&D.
These non war times are ideal for such allocations and it is surprising when union budgets increase the defense allocations randomly instead of using the opportunity to encourage a manufacturing base and indigenisation!
The initiative of change must come from the top, as has been the case with China, where Hu Jintao himself was the torchbearer for the growth of science and technology. Otherwise, India might well be buried under the burden of being the world’s largest arms importer – a tag that can prove too costly for the country in the long run. And for this, there has to be a will; will to become self reliant and not will to facilitate corruption. As of now, the will seems to be for the latter, because the allocation for this great cause of indigenisation in this current budget of a whopping Rs.2.03 lac crore is... Any guesses? Well, a similarly mind-numbing total of one crore! Need I say more?

[B16] DR. ARINDAM ON INDIAN ECONOMY

As we dole out intellectually dead budgets, Cuba shows how commitment for the downtrodden can make a country great!

31 January 2014 | Dr. Arindam on Indian Economy

With another forgettable budget being presented in India, let me show how real commitment for the downtrodden can alter a country’s economic landscape! When the capitalist West won the Cold War against Soviet Union and Eastern European nations, it became an underlined conclusion among political pundits and in fact a common perception that capitalism was the real path for success – rather than socialism, which was made to appear as a sure shot road to economic doom! However, this self-ratified superiority of capitalism and the entire Western chest-thumping exercise that existed during those times and even the succeeding decades are all but gone. United States is grinding it out through an extended recession streak and Europe is literally struggling to keep the eurozone in one piece, with the entire eurozone on the verge of collapsing like a broken jigsaw puzzle. The recession in Europe and North America, which started in 2008, is like a never-ending nightmare with no sight of revival whatsoever! Reports of frequent protests all across Europe with people ransacking and vandalizing public property tell volumes about the distorted economic model of the entire region. One such set of protests – the Occupy Wall Street movement – epitomized the public outrage against the capitalistic style of governance in the United States. What worked for Barack Obama during these times of instability, were perhaps his pseudo-socialistic doctrines, which marked the beginning of a new economic era in a country that was once considered an unrelenting proponent of and for capitalism. In similar lines, the current chaos in developed economies too is speeding a transition towards a new economic pattern... a pattern that is gradually reinstating the very essence of socialism once more!
Spearheading this latent movement forever has been Cuba, which has shown incredible resilience against the American tirade and in many spheres is much better placed than most capitalist countries across the globe. The US trade embargo against Cuba – which the Cubans prefer to call an “economic blockade” – with its entire wherewithal could not destabilize their economy. An example typifying how the United States has continuously bullied Cuba was when America stalled the passage of a Swedish medical equipment consignment on the ground that the filters attached with the instruments were patented under US law. In similar fashion, America has regularly curtailed transactions of Cuba with various countries and corporations – whether it was to do with importing diagnostic instruments from Japan, chemicals from Italy, or X-Ray machines from France. But in spite of such attempts to distort and damage the Cuban economy, the country discovered many avenues to bypass the truant American meddling, by entering into joint ventures with foreign corporations and infusing investment in their home turf. The tie-ups Cuba managed included corporations from Germany, France, Brazil, Canada and even UK. The total project outlay from foreign collaboration in Cuba has surpassed $5 billion and is ever increasing now, involving around 60 different countries in 40 different sectors with the total number of such projects exceeding 240! That’s an incredible feat considering that Cuba has been economically isolated by the United States for decades now, with very few political and economic patronages worth mentioning. They did it on their own and did it with a socialistic approach! They escaped the clutches of recession, which shaped the misery of most Western nations, with their committed socialistic bent; and their economy is now advancing at an astronomical rate of 9.6 per cent per annum.
Besides economic advancement, the neo-socialist model of Cuba also refurbished the social fabric of the nation. It’s one of those few nations that provide free education to all its citizens. Right from pre-school to doctoral degrees, Cuba guarantees free education to everybody, an initiative that is seen with awestruck disbelief by the huddle of capitalist economies. Even as per the CIA Factbook, Cuba’s literacy rate, with around 99 per cent of population being literate, is far better than its capitalist neighbours like US and Canada.
Likewise, healthcare too is free for all its citizens – and unlike the situation in developing countries like India, healthcare centers in Cuba are not the epicenters of filth, neglect and corruption, but state-of-the-art facilities provided at a modest cost. In fact, the country spends around 45 per cent of its budget on education and healthcare, which itself speaks more than anything else. WHO records show Cuba’s life expectancy as 78 years and infant mortality at 4.7 deaths per 1000 live births – both records are way better off than scores of Western nations. This is owing to the fact that Cuba today has one of the best states of health and medical infrastructure in the world. Today, when capitalism is able to provide a social safety net to only a small fraction of people, Cuba on the contrary has proved that socialism can work for the masses – a country where starvation, unemployment and disease are rare phenomena.
Keeping the essence of socialism intact, Cuba is the only country that charts the country’s growth path in consultation with its workforce, labourers and other local bodies. This showcases its commitment for collective work. That’s trademark socialism, which did not get erased in Cuba despite the various trials and tribulations that it had to go through. And now, Cuba is inspiring NATO nations like France to imbibe its model; this is a remarkable shift from their capitalist background. Liberals among American scholars are admitting the same.
An article by Roger Burbach, Director of the Berkeley-based Center for Studies of the Americas, showered heaps of accolades on Cuba for combating recession the socialist way... and winning it too! No country in the world consults its working class in framing its policy measures like Cuba does; Cuba places the interests of its working class at the highest pedestal and ergo does not rely on the inhumane capitalist calculations of crony corporations.
Cuba has shown that the American way of benchmarking living conditions against profits and turnovers is a fallacy in itself, as these capitalist financial figures do not necessarily translate into real standards of living or happiness levels. The economic policies of USSR and its ilk might not have been perfect but the value of socialism doesn’t sink with their downfall. To the contrary, socialism can emerge even stronger with the right kind of policy frameworks in place. This has been proven by Cuba, a country that is rising as a pied piper carrying along a new herd of nations with it. I wish our finance ministers had learnt some lessons in commitment from Cuba!

[B17] DR. ARINDAM ON INDIAN ECONOMY

Making Macau out of Andaman and Lakshadweep!

31 January 2014 | Dr. Arindam on Indian Economy

While I was contemplating what to write in this week's editorial, James Packer was publicly announcing his plans to invest $400 million for a casino resort in Sri Lanka. In a speech at the Commonwealth Business Forum in Colombo, he said that his casinos would act as ‘‘a leading tourist mecca for the rising middle class of India, China and the rest of Asia.’’ Without a doubt, Packer has got his figures worked out pretty well. Despite a domestic ban on gambling, Indians do illegally indulge in various forms of gambling and betting every year. Some reports suggest that the size of the domestic gambling and betting 'industry' could be beyond $60 billion a year; and this is not counting the amount Indians spend abroad in casinos and betting centres. However, most of these instances are not in public view and are virtually impossible to track. Here is where the government needs to make smart plans to exploit the benefits of both the worlds. Going by the way India wishes to increase tourism, and perhaps even minimise the number of Indian tourists going abroad (to save foreign exchange), the authorities need to seriously consider setting up domestic gambling centres as these could give quite a significant impetus to tourism revenues, given the lessons that are there to be learnt from Vegas, Macau and Singapore. Can ‘Incredible India’ and mini-Vegas, for the sake of argument, exist at one place? I am not advocating that India adopts gambling blindly – given the negative connotation the word exudes – nor am negating the social malaises that gambling might bring, but am simply pointing out that the government should at least review the undeniable global correlation that exists between GDP growth and setting up legalised gambling and betting centres within the country.
If the worry is that legalising gambling in India could increase social exploitation, one could explore setting up of such centres in stand-alone territories like Andaman and Lakshadweep islands, test out the initial waters and economic benefits, and depending upon the experiences and lessons learnt, open up more centres in other states. Opening highly regulated casinos in such stand alone territories may actually give a huge boost to employment and lifestyle in these regions.
Las Vegas is a case in point. Thanks to gambling, Las Vegas today has an impressive employment rate and low tax burden. Similarly, legalising gambling turned the odds in favour of Mississippi. In another case, Tunica – one of the poorest counties in the Mississippi delta – today boasts of a low unemployment rate, low food subsidies and low state welfare expenditure. Even during the slowdown, in the year 2010, the American Gaming Association confirmed that gaming services contributed almost $125 billion to America’s GDP, apart from providing 820,000 jobs and raking in close to $49.7 billion from tourists. As per the Casino Association of South Africa, casinos have contributed 143 billion rand to South Africa’s GDP since being legalised in 1996.
Macau, one of the most-sought after gambling hubs in the world, has seen itself growing at light-speed! The province not only has seen a surge in employment and lifestyle but has seen a huge increase in per capita income, which today stands at around $78,000 – 10 times the average Chinese income and notches above the average American income. And this didn’t take centuries to happen. It literally happened overnight. Macau is well-connected to China via water, air and land and witnesses around 80 million Chinese visiting this province, spending over $100 billion every year. Today, by various estimates, the revenues earned by Macau is six times that of Vegas. The Statistics and Census Service confirmed recently that the region’s quarterly economic growth was propelled by an 8.5% increase in exports of services, specifically gaming.
However, amidst all nations, one nation that has exploited the benefit of capitalism, yet kept socialism intact is Singapore. It is a classic case of ‘Happy Capitalism’. The nation today has some of the world’s largest casinos and generates revenues close to what Vegas generates, but has been successful in keeping the social malaise out of the system. On the one hand, the island nation invited two of the world’s biggest casino companies to open gaming resorts in the nation, and on the other, it formulated laws that kept the doors of the casinos closed for its own people. The nation has strict rules for Permanent Residents (PRs) with respect to gaming halls and casinos. Locals are usually discouraged from entering these halls and are heavily prosecuted in the case of a breach of law. The Singapore government, does however allow locals to stay inside a casino for 24 hours straight on the payment of S$100 (Singaporean dollars) or have multiple entries per year on the payment of S$2000. At the same time, the government of Singapore also regularly educates casino operators about discouraging locals and has released mandates for creating ‘virtual walls’ between locals and casinos. Notwithstanding that, civil servants and bureaucrats in Singapore are prohibited from entering casinos and gaming centres. Bureaucrats having an annual pass for entry into casinos need to regularly submit detailed logs describing their visits to casinos.
A statutory board called the Casino Regulatory Authority of Singapore (CRA) is responsible for administration and enforcement of the laws as laid down by the government. They ensure that no one (including tourists) below the age of 21 years is allowed entry into the casinos; the operators under no circumstances extend credit limit for the PRs; no automated teller machines (ATMs) are installed within the casino premises; problem gamblers are stopped from entering the gaming halls. Moreover, with the setting up of the National Council on Problem Gambling (NCPG), families can get their family members banned from entering casinos. Even families of adult foreign students studying in Singapore can apply for such bans on their wards. As of last count, around 90,000 people have been banned on individual requests while another 1500 have been banned on family request. And of course, any citizen who has filed for bankruptcy is by default banned. Additionally, no direct casino advertisements are allowed in any form. Taking it steps ahead, the government has banned opening of any independent casinos; only resort-casinos are given licenses to operate.
Looking at the Singapore example, why can’t the Indian government invite international casino giants to open integrated casino resorts in Andaman and Lakshadweep and convert them into the Macaus of India? Like I mentioned above, it would not only increase tourism but would also encourage tourists visiting south-Asia to alter their itinerary and add India to their travel plans. However, like Singapore, there should be strict rules in order to keep locals and Indian nationals away from gambling, or there should at least exist structured caps on betting amounts, depending upon income and family approval of Indians. But under no circumstances should such resorts be replicated in the hinterland and under no circumstances should locals be allowed to enter casinos regularly. With Kazakhstan, The Philippines, North Korea and Taiwan, planning to do a Macau themselves, it would be a bad bet to for India to not explore this potential opportunity!

[B18] DR. ARINDAM ON INDIAN ECONOMY

Private Equity: The double-edged sword!

31 January 2014 | Dr. Arindam on Indian Economy

When it comes to Private Equity (PE), there can be numerous schools of thought. You have the group that would completely go gaga over PE. You have another that would simply want to wipe off this infatuation from the market. There is also one that would hold PE responsible for failed, inefficient and weak government policies. In India unfortunately, what we have (mostly) seen so far is the havoc that PE has caused. And I clearly see it as one key reason that has snowballed into the economic crisis that we face today.
It was back in 1946 when PE emerged in the American market in its true sense. The era between 1960s to 1980s saw the Vanderbilts, Whitneys, Rockefellers and Warburgs build fortunes in businesses ranging from real estate construction projects to airlines, banking to whatever moved on the streets of Silicon Valley. Running parallel and equally fast was Warren Buffet, who through Leverage Buy-Outs (LBOs) acquired one corporation after another. The US Congress then opposed every change in tax policy that could have made life more difficult for PE firms (the Carter Tax Plan of 1977 was the first of such acts that failed to be enacted). What followed up until 1990 was quite understandable (given the quick, sweet success PE had witnessed in its early years). Thousands of PE labels mushroomed across the globe.
But beneath this rolling of the Red Carpet was a weakly-constructed foundation. Cracks on the PE wall first became visible in the first half of the 1990s. Ills related to the massive rise in leveraged buyouts that were financed by junk bonds led to the-then collapse of the LBO industry. Amidst various companies that went into a tailspin was a big name – Drexel Burnham Lambert. This one company that was credited for the boom in PE back in the 1980s had several allegations made against it. The firm was charged with insider trading and had to file for Chapter 11 in 1990. Thus, one of the founding pillars of PE was turned to dust. Companies and markets across the globe experienced a similar avalanche.
The ‘true’ global effect of PE became more publicised and shamefully dramatic in the early 21st century. It began with the dot-com bubble bursting. This disaster has so far caused the maximum damage because it sent more than just tremors across the global financial market. It shook the very belief in Private Equity (and Venture Capitalism). In the quick years that followed this early 2000s disaster, more than half of PE firms that had invested their dimes and coffers in web start-ups were forced to throw in their towels. Of course, the market as a whole, and the investors were left at the mercy of no modern capitalistic gods. Many IT firms that had become bigger with the prime support of PE saw the cash and asset balance levels in their wells fall. Much below even the amount of capital initially invested! And the biggest reason for such an unwanted outcome was that those very PE firms that had promised to fuel their dreams ran out of fuel themselves. They backed out in the name of retreat and failed to live up to their investment commitments. By the end of the year 2000, globally, the count of PE firms fell by a horrific 50 per cent!
Obviously, India was not one to remain idle when it came to being mesmerised by this hypnotic trick and believing in the permanent magic of a volatile formula. It was one of those markets that felt the maximum impact of the dot-com bubble slap. The Indian IT industry came under huge pressures – returns vapourised for some time and much hope was lost. There are huge apprehensions still – that have spread to other verticals. Even today, every now and then, cases of insider trading and embezzlement are reported across various sectors. And we’re not even counting unrevealed scams yet. Private equity dealings in the first decade of the 21st century has left us in ruins. Worse, during this period, PE entered one sector after another and that resulted in excess supply being created. The bubble of a hope that PE generated ruined organisations far and wide – some temporarily and some forever – with excess pressure of expansion that has left them in a complete mess with visible supply-demand mismatch.
Take for instance the case of the much-hyped – and one that still finds fanatic believers – industry (in India) called Real Estate. Real estate was once considered an immovably strong and non-volatile sector. Then came PE intervention, and left the industry in a shambles. It’s one heck of a mess you cannot just ignore. Back in the 1997-2003 period, withdrawal of funds by PE led to a crash in Mumbai region’s real estate business. The same was repeated in the 2011-2012 period when prices of real estate properties fell by 20 per cent (and higher) in Delhi and Mumbai. The fundamentals of the entire sector have seen a paradigm shift after the SEZ Act of 2005. Most residential and commercial concrete jungles that were built post-2005 were aimed towards investors who wished to park their money in real estate properties. Ghost towns were being built all around the metros and bigger cities, and were sold at prices that were headed for the moon. [Forever it seemed.] What is the present scenario? When PE investors decided to stop funding such ‘(not-so-)concrete’ dreams by cutting off the supply of money, the expected came to pass. Empty malls, vacant residential properties, half-completed high rises and incompletely dug up construction sites with building material left untouched for months is a common sight. Not many souls move about in such ghost towns these days! How PE has totally tricked buyers and sellers in an entire industry is an incredible story to be told. But not one to gain inspiration from.
Holistically stated, the purely economical repercussions of PE’s entry and exit across sectors and markets have also led to several socio-economic crises. In a 2011 study by the University of Chicago, Harvard Business School and the US Census Bureau, it was proved that “companies tend to terminate more employees after a buyout compared to competitors in the same sector.” “After a PE buyout, employment in existing operations tends to decline relative to other companies in the same industry by about 3 per cent. Many of those job losses are undoubtedly painful,” writes Prof. Steven Kaplan, the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, in a 2012 article titled, ‘How to think about Private Equity’. But PE investments always offer higher returns given the risks. Right? Actually, no! In a 2005 study by Prof. Steven Kaplan of the University of Chicago Booth School of Business and Prof. Antoinette Schoar of MIT, covering the period ranging from 1980 to 2001, it was revealed that, “Investors actually made slightly less on PE deals than they could have by investing in an S&P 500 Index fund.”
All in all, PE funding not only degrades and makes a sector volatile but also injects malpractices into companies. Thought leaders have not been very vocal about it, but in the West, film-makers have tried to depict the same through their works. Today, PE funding worldwide is headed southwards. And that is good news. It implies greater stability for the global economy as a whole. A more sustainable future, if I may add. In the last one decade or so, PE ownership across companies has reduced by leaps.
Going back where I started, when it comes to PE funding, there are several schools of thought, but when it comes to India, the thought that PE can and will leave you in ruins appears most logical. The Indian government has to be very careful going forward about the manner in which it allows PE to enter any given sector – whether it be for the sake of developing Greenfield projects in the most undesirable of sectors or for the sake of lighting a bulb in the most underdeveloped of villages.
PE is a double-edged sword. Popular perception is that it makes you stronger – but only until you measure the blood you have lost. Period!

[B19] DR. ARINDAM ON INDIAN ECONOMY

WHO said there are no free lunches; our parliament is living example of it!

31 January 2014 | Dr. Arindam on Indian Economy

When it comes to Private Equity (PE), there can be numerous schools of thought. You have the group that would completely go gaga over PE. You have another that would simply want to wipe off this infatuation from the market. There is also one that would hold PE responsible for failed, inefficient and weak government policies. In India unfortunately, what we have (mostly) seen so far is the havoc that PE has caused. And I clearly see it as one key reason that has snowballed into the economic crisis that we face today.
It was back in 1946 when PE emerged in the American market in its true sense. The era between 1960s to 1980s saw the Vanderbilts, Whitneys, Rockefellers and Warburgs build fortunes in businesses ranging from real estate construction projects to airlines, banking to whatever moved on the streets of Silicon Valley. Running parallel and equally fast was Warren Buffet, who through Leverage Buy-Outs (LBOs) acquired one corporation after another. The US Congress then opposed every change in tax policy that could have made life more difficult for PE firms (the Carter Tax Plan of 1977 was the first of such acts that failed to be enacted). What followed up until 1990 was quite understandable (given the quick, sweet success PE had witnessed in its early years). Thousands of PE labels mushroomed across the globe.
But beneath this rolling of the Red Carpet was a weakly-constructed foundation. Cracks on the PE wall first became visible in the first half of the 1990s. Ills related to the massive rise in leveraged buyouts that were financed by junk bonds led to the-then collapse of the LBO industry. Amidst various companies that went into a tailspin was a big name – Drexel Burnham Lambert. This one company that was credited for the boom in PE back in the 1980s had several allegations made against it. The firm was charged with insider trading and had to file for Chapter 11 in 1990. Thus, one of the founding pillars of PE was turned to dust. Companies and markets across the globe experienced a similar avalanche. The ‘true’ global effect of PE became more publicised and shamefully dramatic in the early 21st century. It began with the dot-com bubble bursting. This disaster has so far caused the maximum damage because it sent more than just tremors across the global financial market. It shook the very belief in Private Equity (and Venture Capitalism). In the quick years that followed this early 2000s disaster, more than half of PE firms that had invested their dimes and coffers in web start-ups were forced to throw in their towels. Of course, the market as a whole, and the investors were left at the mercy of no modern capitalistic gods. Many IT firms that had become bigger with the prime support of PE saw the cash and asset balance levels in their wells fall. Much below even the amount of capital initially invested! And the biggest reason for such an unwanted outcome was that those very PE firms that had promised to fuel their dreams ran out of fuel themselves. They backed out in the name of retreat and failed to live up to their investment commitments. By the end of the year 2000, globally, the count of PE firms fell by a horrific 50 per cent!
Obviously, India was not one to remain idle when it came to being mesmerised by this hypnotic trick and believing in the permanent magic of a volatile formula. It was one of those markets that felt the maximum impact of the dot-com bubble slap. The Indian IT industry came under huge pressures – returns vapourised for some time and much hope was lost. There are huge apprehensions still – that have spread to other verticals. Even today, every now and then, cases of insider trading and embezzlement are reported across various sectors. And we’re not even counting unrevealed scams yet. Private equity dealings in the first decade of the 21st century has left us in ruins. Worse, during this period, PE entered one sector after another and that resulted in excess supply being created. The bubble of a hope that PE generated ruined organisations far and wide – some temporarily and some forever – with excess pressure of expansion that has left them in a complete mess with visible supply-demand mismatch.
Take for instance the case of the much-hyped – and one that still finds fanatic believers – industry (in India) called Real Estate. Real estate was once considered an immovably strong and non-volatile sector. Then came PE intervention, and left the industry in a shambles. It’s one heck of a mess you cannot just ignore. Back in the 1997-2003 period, withdrawal of funds by PE led to a crash in Mumbai region’s real estate business. The same was repeated in the 2011-2012 period when prices of real estate properties fell by 20 per cent (and higher) in Delhi and Mumbai. The fundamentals of the entire sector have seen a paradigm shift after the SEZ Act of 2005. Most residential and commercial concrete jungles that were built post-2005 were aimed towards investors who wished to park their money in real estate properties. Ghost towns were being built all around the metros and bigger cities, and were sold at prices that were headed for the moon. [Forever it seemed.] What is the present scenario? When PE investors decided to stop funding such ‘(not-so-)concrete’ dreams by cutting off the supply of money, the expected came to pass. Empty malls, vacant residential properties, half-completed high rises and incompletely dug up construction sites with building material left untouched for months is a common sight. Not many souls move about in such ghost towns these days! How PE has totally tricked buyers and sellers in an entire industry is an incredible story to be told. But not one to gain inspiration from.
Holistically stated, the purely economical repercussions of PE’s entry and exit across sectors and markets have also led to several socio-economic crises. In a 2011 study by the University of Chicago, Harvard Business School and the US Census Bureau, it was proved that “companies tend to terminate more employees after a buyout compared to competitors in the same sector.” “After a PE buyout, employment in existing operations tends to decline relative to other companies in the same industry by about 3 per cent. Many of those job losses are undoubtedly painful,” writes Prof. Steven Kaplan, the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, in a 2012 article titled, ‘How to think about Private Equity’. But PE investments always offer higher returns given the risks. Right? Actually, no! In a 2005 study by Prof. Steven Kaplan of the University of Chicago Booth School of Business and Prof. Antoinette Schoar of MIT, covering the period ranging from 1980 to 2001, it was revealed that, “Investors actually made slightly less on PE deals than they could have by investing in an S&P 500 Index fund.” All in all, PE funding not only degrades and makes a sector volatile but also injects malpractices into companies. Thought leaders have not been very vocal about it, but in the West, film-makers have tried to depict the same through their works. Today, PE funding worldwide is headed southwards. And that is good news. It implies greater stability for the global economy as a whole. A more sustainable future, if I may add. In the last one decade or so, PE ownership across companies has reduced by leaps.
Going back where I started, when it comes to PE funding, there are several schools of thought, but when it comes to India, the thought that PE can and will leave you in ruins appears most logical. The Indian government has to be very careful going forward about the manner in which it allows PE to enter any given sector – whether it be for the sake of developing Greenfield projects in the most undesirable of sectors or for the sake of lighting a bulb in the most underdeveloped of villages. PE is a double-edged sword. Popular perception is that it makes you stronger – but only until you measure the blood you have lost. Period!

[B20] DR. ARINDAM ON INDIAN ECONOMY

B20 THE NATIONAL LAND LOOT ACT’ NAMED ‘THE SEZ ACT’...

31 January 2014 | Dr. Arindam on Indian Economy

A couple of interesting reasons prompted me to write this editorial on the Special Economic Zones (SEZ) Act 2005. Firstly, the amount of attention it has received, and secondly, the entire logic with which the Ministry of Commerce and Industry is driving the Indian SEZ bandwagon. Though it took the ministry decades to realise the potential of SEZs, the concept finally got kicked off in the year 2005. The bill was passed by both houses in 2005, which eventually was called the SEZ Act. Once passed, the Indian policy makers have decided of approve, hold your breath (!), a staggering 237 SEZs for the country! The logic for such staggering madness: to create an enabling environment for investments and counter China in its own turf, as it is universally believed that those are the Chinese SEZs that are critical reasons for China’s phenomenal economic success and are also instrumental in attracting voluminous FDI to China.
But the reality is, the experiment that started in 1979 with four SEZs – namely Shenzhen, Zhuhai, Xiamen and Shantou – could barely attract any FDI ($2 billion for the first couple of years). It was much later in the 90s that the Chinese started attracting more investments, simply because the investors saw a huge market in China, as the Chinese State by then had successfully generated productive engagements for millions of Chinese, thus enhancing their purchasing power.


So the entire logic on which the Ministry of Commerce and Industry has based its investment expectations is by itself flawed. In the right perspective, SEZs still hold a possibility of success, but the current SEZ Act drive reminds me of the industrial licensing era, where licenses were never issued to competent entrepreneurs, but to the ones who had close proximity with the ruling Government. And we all know what the result was: The Indian manufacturing sector kept competing in the 90s with 80s’ products, manufactured with 70s’ technology. If industrial licensing had taken India back by decades, then this SEZ Act, in its current form, is more devastating and is going to take India back by generations. Just like in the industrial licensing era, there is complete lack of transparency in the entire system of allocation of SEZs. And this time, it is not just about handing over licences, rather about handing over colossal pieces of land (which are agricultural land in most of the cases – for example, the 14,000 hectare SEZ coming up near Mumbai and the 1,000 hectare coming up in Jhajjar, close to Delhi,

are both primarily agricultural) to a select few corporations, the credibility of most of whom is yet to be tested and proved in the areas of infrastructure development. Moreover, unlike their Chinese counterparts (Chinese SEZs, which today are a huge success – including Hainan and Pudong near Shanghai, which were added later – are strategically located primarily on ‘wastelands’, close to ‘ports’ and ‘trading and financial centres’ of South-East Asia like Hong Kong), in most of the cases, the nominated Indian SEZ land is nowhere close to any port. Which means, all the economic activity that the ministry is talking about would again hit a roadblock (as the movement of goods from these SEZs to the ports would be through our existing road infrastructure, which is anyway in a poor state).
The bigger malaise is that unlike the license era, this time, the ownership of the targeted land is being transferred to the corporation from none else than the farmer, at that too at a price, which does not have any economic rationale. The modus operandi is simple: the state government would steam-roll the farmers into selling their land and then would transfer it to the corporation at a little higher price, which still is much lower than the market price. This process would eventually displace more than 100,000 farmer families, plus an equal number of those families who are indirectly dependent on these lands. Even if the Ministry of Commerce and Industry argues that these SEZs would enable mass scale employment, it does not make any sense, as for the industrial houses to absorb the farmer families with their current skillsets doesn’t make any economic ratonale, unless the same is made mandatory.
As if this were not enough, these landowning corporations, and the ones who would be operating in these SEZs, also get all kinds of tax exemptions for the next five to ten years to come (What more, the Reserve Bank of India had stated that the revenue loss in direct and indirect taxes would be to the tune of Rs.900 billion by 2009/10). No doubt, India, with its current fiscal health, cannot bear this revenue loss; and the burden would invariably fall on the Indian middle class.
All in all, the entire Act in its current shape looks like a classic strategy for a pan-national loot. It is disgusting that we are still contemplating such an Act whereby only a handful of business houses gain and most of India loses. If SEZs are meant for development in the truest sense, then, instead of allocating land from the agricultural and developed peripheries of the states, why can’t the land be allocated in the most economically inactive regions, so that positive externalities not only benefit these regions, but also help in reducing the existing regional disparities? Even if the government is compelled to continue acting the way they are in some cases, why is it that land is bought over from the farmers and transferred to the private enterprise? Why can’t we follow the Chinese route where the State owns the land and develops the infrastructure and invites private enterprises to invest? Or why can’t we leave the ownership of the land with the farmers, whereby every farmer becomes the shareholder to the SEZ, so that like other stakeholders of the SEZ, with infrastructure development, the farmers too would gain in the longer run? And for those farmers who want to sell their land outright, why can’t the private SEZ guarantee employment of at least one member of the family with health insurance and education for everyone?
It is not that our honourable Minister of Commerce and Industry is ignorant of this ‘national loot’, but he is trying his best to rationalise it with his trickle-down rhetoric. But Sir, let me tell you that the SEZ Act, in its current form, can only trickle down loads of misery and pain for the economically, politically and socially poor of this country. The crux is: if the Chinese model needs to be emulated, then put the trickle-down theory in the back-burner and adopt the Chinese trickle-up approach. Just concentrate on creating purchasing power for people at the bottom and remove mass scale poverty. Prosperity would automatically trickle up. And then you don’t need to try so hard to chase investments. In fact, investments would chase you, as mass purchasing power by itself attracts investors. Sir, let not the SEZ Act be known one day to historians as the National Land Loot Act...

[B21] DR. ARINDAM ON INDIAN ECONOMY

A historically insensitive budget: A case of missed opportunities

31 January 2014 | Dr. Arindam on Indian Economy

My immediate reaction, after hearing the Union Budget speech by our honourable Finance Minister (FM) was that this budget should not get more than 2 on a scale of 10. The reason? It was an extremely rare opportunity that a Finance Minister would have everything going in his favour while going to present his budget and yet it turns out to be a damp squib for every stakeholder of the economy. The fact is that Indian economy has been growing consistently by more than 8% for quite a few quarters now. The forex reserve stands at an all time high of around $188 billion, merchandise exports are on the verge of crossing the magic figure of $125 billion. Yet our FM found it difficult to garner all the courage to go ahead with a path breaking budget. Understandably the reasons for such sub-standard budget has nothing to do with the future of the economy but was intended towards the prospects of the United Progressive Alliance in the forthcoming elections. Amazingly, it miserably failed here too (!)
Coming afresh from the drubbing it got in the Punjab and Uttarakhand elections, the embarrassment from the leakage of the Quattrochi fiasco, and the untamable inflationary pressures, it was taken for granted that the FM would be too browbeaten to take too many initiatives. But no one expected such a hopeless budget, listening to which was more of a waste of time. But still probably many continued listening just in eager expectation that there would somewhere be some or the other kind of ray of hope, if not for the common man then at least for the industry so that its growth in turn can create employment for the progeny of the common man. But on the contrary this is one of those rarest of rare budgets which made everyone, starting from the stock market broker, the industrialist, the professionals and the middle class extremely upset. There’s nothing for anyone except those who pet dogs have allergy for Indian made food and completely depend on imported pet foods for their continued existence in a country, where it is a norm rather than an exception for the farmers to commit suicide.
In the first glance one may think that why am I so critical about the budget when it seems that the allocation for almost all the social sectors have been increased? But a closer look shows a different picture altogether. For example, the honourable Finance Minister claims to have increased the allocation on education by 34.2% to Rs 32,352 crore and for health and family welfare by 21.9% to Rs 15,291 crore. In actual terms it might sound impressive, but in reality there is no change with the previous year, if one compares the allocations as a percentage of GDP. Moreover the same allocation when compared to a population of 1.1 billion, (for the fact that on these parameters we have been ranked 126th by the UNDP)
in addition taking into account the increased inflation coupled with the fact that majority of this money would go in servicing the salaries of the teachers and the increase of seats for the quota, there isn’t anything that is left. In the same league, the much hyped National Rural Employment Guarantee Scheme which was started with much fanfare last year for 200 districts with an allocation of Rs 11,300 crore, out of which according to the Economic Survey only Rs 6714.98 crore had been released till 31 January 2007. The FM took lot of pride in announcing that the scheme has been extended to 330 districts and the allocation has been increased to Rs 12,000 crore. This means a mere increase of Rs 700 crore for 130 districts. How much does then each district gets is now anybody’s guess. And coupled with the manner in which the scheme is functioning For HIV control programmes the FM has increased the allocation to Rs 969 crore. Imagine and compare that amount to control the most lethal disease in a country with 1.1 billion population and with the second largest population of HIV patients (5.1 million). No wonder it then tells the story about how sincere the government is to arrest this epidemic. FM’s decision to grant a scholarship of Rs 6,000 per year as means-cum-merit to 1,00,000 students to check school dropouts too might seem impressive but then again compare it with around 30% of our population living below poverty line for whom sustainable improvement in living conditions is only possible through education. In such a situation one lakh is nothing more than pittance.
In case of agriculture too, the Finance Minister, except for the customary increase in the allocation for irrigation and a few other nondescript things (factor in the increase in inflation and growth of GDP), hasn’t tried to deal with the real malaise of the sheer absence of a vibrant agricultural market which makes it difficult for the farmers to find the right price for their produce. Just as it has been for most of the other sectors where competition not only improved quality but also reduced prices; unless we decontrol agriculture and bring it out of the clutches of the babus and middlemen, farmers would continue to die… a few promises here and there notwithstanding.
Similarly by increasing the dividend distribution tax the finance minister has robbed the common man of an increase income through dividend. Moreover, he has now put an education cess of 3%. But the pertinent question remains that who would make sure that this money would be spent on education and not on giving subsidised food in parliament canteens?
While writing this column, (and on second thoughts) I felt that probably I went a little overboard while giving this budget a score of 2 on 10. Ideally, it should have been 0.5 on 10. This magnanimous score of 0.5 is on account of FM’s whole hearted effort of making the economy handicapped and a half hearted initiative for physically handicapped.

[B22] DR. ARINDAM ON INDIAN ECONOMY

Salary rise for the rich, price rise for the poor! Can you think of anything more shameful?

31 January 2014 | Dr. Arindam on Indian Economy

My dear readers must first be told a little about the country they live in, to understand the story I am about to tell in the right perspective. India is the land where we have defined the poverty line at a shameful level of about Rs 450 per person per month (shame we don’t call it the destitution line)! And below this shameful definition of poverty line lies 29% of our population. When we give a reasonably respectable definition of Rs 750 per capita per month (though the worldwide accepted definition of poverty line is a dollar a day ie Rs 1,200 per capita per month), we find roughly 65% of our population falling below the poverty line! That means in India, more than 65% of the people earn less than Rs 750 per head per month! Given that definition of poor, the definition of rich would definitely be those earning more than Rs 3,000 per capita (i.e Rs 15,000 per month for a family of 5) in the context of the country we are talking about. If it shocks you, then for your comfort, let me call them the middle class of today.
Given this new and logic-proof definition, let’s take a look at what’s happening in India right now. In the last issue itself, The Sunday Indian undertook a survey in the metros with the help of the Indian Council for Market Research (ICMR) to find out who will India vote for during elections. The results were totally clear... The budget bonanza had failed to work. People – the middle class and poor – are fed up with rising prices (and corruption). Ironically, this comes at a time when leading financial dailies are going upbeat about corporate salaries in India. They are rising faster than anywhere in the world and this April, India Inc. is expected to give the highest average increments in the world! Not just that, it’s party time for the top 15% workforce in India. Literally at the cost of the rest of the country, their wages are all set to increase by up to 40% this year, thanks to the Pay Commission Report! About six million people have been given hikes up to 40% (with even retrospective effect) costing the government an immediate outflow of an estimated Rs 40,000 crores this year! But this should not be looked at in isolation – going by past trends and the already generated demand, a similar raise is on cards at the state government level, which will take the total number of people getting hike to about 15 million. That will further lead to a rise in salaries up to the municipality levels, as well as in the public sector, and finally amongst the unionised private sector workforce too! Finally, the number of people getting an out-of-turn extraordinary salary hike will settle around a figure of 60 million i.e. about 15% of our total workforce. Not that the people for whom the new Pay Commission comes, were not given yearly salary adjustments and hikes.
But this is a special election year!!! During this budget session itself, this same workforce population (15%) was given a neat Rs 40,000 crores through an increase in the income tax limit!! And where do you think these increases get diverted on to? To increasing prices! Because those who are a part of the market system – read the rich – will immediately pass on the burden to the others. And never ever forget that these rising prices – which we call inflation – have a double negative effect on the poor. Their salary doesn’t grow at the same pace as the prices; so they invariably have to buy more expensive things with lesser money in hand. So in effect, in countries like India, inflation invariably leaves the poor poorer (read 65% of the masses at the least). It further leaves the middle class where they were. And it is beneficial only for those whose salaries have grown more in proportion to the price rise, the reason in effect for the price rise!
So what am I left to conclude with? Well, as the heading clearly says, we are living in an era where we are creating a system that is giving a systematic salary rise to the rich and price rise to the poor (because the rich are being more than compensated for for the price rise). It is so unfortunate that the government of some of the best people at heart in Indian politics – Dr Manmohan Singh is undoubtedly one of our cleanest PMs; Sonia Gandhi, one of our most dignified leaders – is being misled into this unbelievable bitter truth by their close advisors. It’s a shame really. The biggest shame actually is that this same government launched one of the most laudable rural employment schemes in the history of independent India – NREGA – but thanks to the lack of coordinated focus and commitment beyond announcements, that programme, which has the power to change the plight of poor in India, lies in a shambles, while thousands of crores of rupees get looted away by the rich at the cost of rising prices for the poor.

[B23] DR. ARINDAM ON INDIAN ECONOMY

WORLD ECONOMIC FORUM OR WORLD HYPOCRITES FORUM!

31 January 2014 | Dr. Arindam on Indian Economy

What do you do when you don’t have solutions to the most pertinent problems devastating the world? Well, you just form a forum of like minded, power hungry and ayesayers, find an exotic resort in Europe and discuss the problems for a few days in the most obscenely luxurious environs and pledge to meet next year again with some new issues to discuss, albeit without any substantial solutions. This is the best way to define a forum most ceremoniously called the ‘World Economic Forum’. From which viewpoint it is a ‘world’ forum, is hard to comprehend. It can be termed a world forum if and only if the world is just about the US and Europe. And since it is not, the World Economic Forum (WEF) is in no way a global forum. So what is it? Well, to begin with, the World Economic Forum is a private entity and not essentially one, which is necessarily represented by all the nation states. Initiated by Professor Klaus M. Schwab (who has been famous for equating the anti globalisation protesters with terrorists), the World Economic Forum has been a forum where companies are invited based on their annual revenues. No wonder, if this is the criteria, then no one can expect any company from under-developed economies to have a fair chance to put forward their view points and problems, forget expecting any substantial solution in return. While the WEF has been crying aloud that it is the ideal platform to discuss pertinent issues plaguing the world, one wonders how does the coming together of the perpetrators themselves solve the problems of AIDS in Asia and Africa, sectarian violence in Iraq and Pakistan, ethnic violence in Sri Lanka, and ripples created by the onslaught of globalisation. Well, one could have still been hopeful of some concrete ideas coming out of it had some prominent organisations, research institutions, think tanks and economists been part of it. But certainly, you don’t expect much when the CEOs of aerated drinks, beverages and chocolate companies come together for a rendezvous. Add to this the millions of dollars wasted on this useless annual event for the so called ‘fool proof’ security from not just terrorists, but also the people who come their to voice concerns through protests and resentments. It is not only that the voices of resentment are gagged, but considering them as threat, a curfew like situation is created to keep the protesters at arms length; while the men who have congregated there, at their hypocritical best, pretend to talk about these very people and their plight. To gauge the scope and depth of the hypocrisy, let’s have a look at one of the theme issues of the forum this year. It’s been named ‘the shifting power equation’, which essentially is all about the emergence of India and China. To realise this ‘global secret’, the organisers have spent millions of dollars, in one of most expensive locales of the world, with a war-time like security arrangements (Frankly, it’s quite clear that neither India nor China was waiting for the WEF endorsement; the ascent of these countries is not because of WEF, but because of the sheer perseverance, dedication, determination and sacrifice of their millions of middle class employees and entrepreneurs). It was also interesting to note that they did feel it pertinent to discuss about the burning Middle East. But even when the entire world knows how the idiosyncrasies of one dim-witted individual destroyed and disintegrated one entire country forever, no one in WEF found it significant enough to take up this issue or to, even for the sake of lip-service, conclude with a solemn pledge that such a thing should not be repeated again anywhere in the world. Understandably though, as the entire conclave is at the mercy of the American multinationals – and their sponsor money – along with American senators, who form the bulk of the heavyweights representing the forum. Trade, globalisation, aid, petro-politics, climate change, were among the other ‘prominent pertinent’ issues that were discussed at the forum with the usual barrage of hollow rhetoric. What more, the mother of all hypocrisy, the home page of the World Economic Forum states – The World Economic Forum is a ‘truly independent international organisation committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas’. The fact is, even if they would have pledged just half of the forum’s income (which runs into millions of dollars) to a miniscule proportion of the billion plus people who don’t have access to safe drinking water and sanitation, it would have made the existence of the forum more meaningful. In fact, to live up to their deeds (defying Shakespeare), the forum should immediately re-christen themselves as World Hypocrites Forum, as there is a lot in a name!!!

[B24] DR. ARINDAM ON INDIAN ECONOMY

It Is Time That It Pays Its Due!!

31 January 2014 | Dr. Arindam on Indian Economy

I don’t remember conducting a single workshop on leadership, where I’ve not referred to the Indian armed forces. For me, Indian defence forces have always been a benchmark of leadership, followership and discipline – the most ideal combination of a successful organisation (defined by the principles of management). The exact opposite of this are most of our other government run institutions, where we only have ‘leaders’ and no ‘followers’. It is ironical that in India, the government employees might not exhibit their leadership skills when it comes to sincerity, perseverance and dedication to their work, but when it comes to fighting for the cause of their pay hikes, they can match the best in protests, armtwisting tactics, mass casual leaves and strikes. Worse is the fact that when they do so, they don’t have any dearth of political support, for there might not be any correlation between the quality of work delivered and pay hikes demanded. Many self proclaimed champions of the so- called downtrodden and deprived immediately jump onto the bandwagon and lend their solidarity. In the recent past, the employees of public sector banks and the railways have resorted to such methods, making an already beleaguered Union government to accept their demand. The very constitution of the Sixth Pay Commission is a result of that. No wonder that as and when the recommendations of the Commission would be announced, there would be an across the board hike of salaries. With the government implementing only those recommendations which suit its purpose of keeping the middle class happy, while ignoring those which doesn’t suit its purpose and would require political resolve to implement. Yet, it would not guarantee an across the board hike in the level of efficiency for the government organisations. What it would guarantee for sure is to inflate both the fiscal deficit and the rate of taxation. But strangely, the only category of government employees who are in themselves benchmarks and whose level of dedication, apolitical approach and professionalism has been unquestionable, have been reduced to such a state that they have to literally beg for a hike in their salary. It is ridiculous that not a single member of an organisation of such strategic importance has ever been included in the Pay Commission. As a result of this non-inclusion, a jawan is put below a chaprasi (according to the Fifth Pay Commission). I wonder, unlike the case of the other government employees, why is it that not a single self- proclaimed champion has ever come up to take up their cause? Is it because, unlike other government employees, they are not allowed to hold the nation to ransom with strikes and protests, because we know that if they do, then the nation goes to the dogs. Forget support or empathy, I really fail to understand the extent of the audacity of our bureaucracy to debate on their demand of salary hike. So what, that in order to restore their lost identity, the three wings of the Indian defence forces have come together to negotiate with the Sri Krishna Sixth Pay Commission? Why is it that we are failing to understand that their demand is not for selfish reasons, but for a larger interest, as all the three wings are facing a severe shortage of manpower. It is common sense that post globalisation, both salaries and opportunities in the private sector have skyrocketed. When compared to the private sector (like a commercial pilot or a IT professional), what a pilot in Indian Air Force or an army officer get is pittance. Yet, when it comes to the delivery of service, their level of professionalism is something that the private sector would vouch for . . . so much so that many are being lured out of their service in the armed forces to join the private sector. In the recent past, the Indian AirForce faced a sort of a crisis, when many of its pilots left to join commercial airlines. This crisis is only going to exacerbate, because of the boom in Indian aviation, coupled with an acute shortage of qualified pilots. But then this is not the case with a typically inefficient clerk of a public sector bank or an inept grade four staff of Indian Railways who though, most of the time are at the forefront of violent agitations for hikes in pay, would never be lured by the private sector and on the contrary, perhaps have no chance of getting another job if they lose the present one. Despite being in the know, what I fail to comprehend is that why is it that when it comes the pay commissions, the civilian bureaucracy has always undermined and subjugated the defense professionals? Probably nowhere else in the world do the armed forces have to literally fight for a pay hike. One finds it difficult to comprehend as to why a government officer who sitting pretty in his office, indiscriminately uses his official power for unofficial purposes and shirk work (day in and day out) and would draw the same salary as his counterpart in the army, who would be living in some of the harshest terrains of the country and face death every moment. All in all it, has been for long that the civil bureaucracy has shortchanged our two million strong armed forces. It is time that it pays its due!!

[B25] DR. ARINDAM ON INDIAN ECONOMY

Irrespective of whether it is rural or urban, the reality is, poverty exists!

31 January 2014 | Dr. Arindam on Indian Economy

Since the story of India’s apocalyptic growth rate and its inclusion in the coveted and prestigious BRIC Report of Goldman Sachs became a daily affair, another issue that became equally regular, is the Great Indian Rural-Urban Divide. Though ironic, there has been reality in this evolving contrast, and much of it also has been substantiated by empirical studies across the nation. It is also true that this divide has not been brought about by default, but more of a manifestation of policy designs. This “intellectually safe and morally right” issue is becoming more ‘passé’, particularly after the Planning Commission stated that poverty is on a decline in rural India and the trend is reversing in the urban areas.
To understand this conundrum, one doesn’t need to have access to the most confidential governmental files. A simple walk around the A-plus category metros of the newly crowned trillion dollar economy would suffice by itself. Whether it is Dharavi of Mumbai, the Jhuggi Jhopdi colonies of Delhi or the miles after miles of slums beside railway tracks in most of the urban centers, all of them stand as perfect metaphors of the evolving crisis. Consider this: an estimated 54% of the population of Mumbai, India’s financial capital, stay in slums. In fact, Kolkata is not very far behind with almost 32.5% of population living in slums, followed by Delhi with 20%; and 18.9% and 17.2% in the case of Chennai and Hyderabad respectively. The most ironical of them is Kolkata; all the more after all the tall claims of the state government’s pro-poor policies, this is the best figure that they could come up with. In fact, according to the 2001 census, the estimated number of slum dwellers in this country has rather staggeringly increased from a level of 27.9 million to 61.8 million in just two decades. Reports also state that in Mumbai alone, an estimated 6.5 million people stay in Dharavi slums in perhaps such conditions that even animals might abhor.
Amidst this brutal reality, the Planning Commission’s claim, which has been taking considerable media space currently, also needs to be scrutinised. Irrespective of the fact whether poverty is largely a rural phenomenon or an urban phenomenon, the reality remains that poverty exists, and that too amongst 200 million plus! That is the primary issue. The claim that the reform process has touched upon the rural poor more than its urban counterparts, is itself questionable. If it were true, then what we observe in the form of Vidharbha and the likes would not have been true.
For most in the rural hinterland who stand perennially starved of any potential opportunities, migrating to cities and towns has been the only option. So, starved for opportunities, the hope of making it big drives flocks of people from rural India to cities like Mumbai and Delhi. These cities can still provide productive engagements to these people, but unfortunately, lack the much needed social and physical infrastructure. On account of myopic, restrictive and Jurassic Age laws like the Urban Land Ceiling Act (ULCA), buildings cannot be made in huge numbers to accommodate them.
Whichever buildings come up (by oiling the government machinery), are anyway so expensive that they remain beyond the reach of the middle class, let alone the poor. As a result, the poor are forced to stay in illegal slums, often devoid of even the bare minimum that people need to survive with dignity. The bigger irony than this is that while the ULCA remains in place, these slums pop up on government land, and stay there, as, due to obvious reasons of vote bank politics, no government dares to demolish these clusters; and yet neither makes them legal. So, in the absence of decent sanitation and other public amenities, there is not just contamination of water and eventual water-borne diseases that take place, but also the accumulation of untreated garbage, which consequently chokes the sewage lines and rivers, and thereby reduces our cities to a cluster of ghettos! It does not require a rocket scientist to figure out the real problem. The first problem lies in the number of cities and major areas of business activities that currently exist in this country. For a country of India’s size and population, we don’t have more than 35 to 40 cities and towns. And almost all the major economic activities of the country are concentrated in these hubs. For the rest of the country, opportunity is at best a chimera! The second problem lies along the falling agricultural income, lack of capital formation and credit infrastructure in rural India.
So, in the given scenario, there is only one workable solution: create hundreds of more economic hubs and cities to check the pressures on the existing ones. At the same time, agriculture will have to be made remunerative through drastic reforms and infusion of capital. If this does not happen, and that too on a war footing, then it would not be long before our existing cities acquire some new meaning altogether and become nauseating museum exhibits for the rest of the world...

[B26] DR. ARINDAM ON INDIAN ECONOMY

The government must bring back all the black money stashed abroad and stop corruption; else, Indian streets might soon look like those of Egypt

31 January 2014 | Dr. Arindam on Indian Economy

Although it is popularly known as a global predicament and India’s biggest, yet nothing is being done about it. I am asked almost everyday, in particular by my online friends on Facebook and other online communities, to write on it. Yes, I am referring to black money and the black hole that our reprehensible politicians, bureaucrats and businessmen collectively have created of this nation. To an extent that there is no other nation which has been looted by its own unscrupulous countrymen, as much as India has been shamelessly looted; and this insidious saga continues on an everyday basis. As per very well researched reports, Indians have stashed away as black money abroad a total amount of money, which is more than our entire national income. The figures are to the tune of an unbelievably staggering $1450 billion of unaccounted money in various foreign banks! And India happens to be the largest account holder of black money abroad. At the second place is Russia with less than a third of the Indian amount at around $470 billion, with UK coming at the third place with $390 billion. The fourth country, Ukraine, has only $100 billion, while at the fifth place is China with $96 billion looking comparatively so clean and holy. That's the unbelievable comparative corruption that our political and business class have been a part of. But then, all of this did not and cannot happen overnight. In fact, for the past sixty years, we have successfully created a system which has allowed people with unending appetite for wealth to systematically siphon off money to closely-held secret accounts in Switzerland and various tax havens globally.
The inculpated seeds of this were sowed during the second five year plan and in such a flawed and inauthentic manner that corruption almost got institutionalized, and generation of black money became a natural extension. In an attempt to make an industrialized India which is self sufficient, the policy framework was drafted around industrial licensing, price controls and import barriers. Though the framework was logical on paper, and had great pedigree of success in erstwhile USSR in the 1920s under the leadership of Stalin – a similar model was simultaneously showing results in China as well under the aegis of Mao – what we forgot was that our pimply political setup was unlike that of the then USSR or China. As a result, though the vainglorious plan was to make India self sufficient, our scabbed policies heretically only went on to make select industrial houses, bureaucrats and politicians self-sufficient at the cost of and to the nation. Industrial licenses were doled out to industrial houses that did not have any track record or any other credibility, other than their proximity to the underhanded political leadership. Ergo, incompetent industrial houses were awarded licenses; and on account of lack of competition, they kept ruling through their quisling political connections and illicit black money. Political parties, in order to keep themselves in power, increasingly got criminalized; and this even got financially supported by funding from the industrial houses. With time, the criminalization in politics gained gigantic proportions and an evil nexus between business, criminalized politicians and the rentier class babus, ran mayhem across the country, making corruption a way of life in India and making national loot their personal obsession!
Amongst all the three classes mentioned above, it is the gangrened political class which has been the biggest offender as not only have flagitious politicians plundered for themselves but they have also created an enabling looting environment for the enterprise to thrive. Estimates published by various media groups reveal that in 1967-68, black money circulating in the country was Rs 3,034 crores, which increased to Rs 46,867 crores by 1979. In simple words, from 9 per cent of GDP in 1968, black money accounted for 49 per cent of GDP by the end of 1979. And mind you, that was thirty years back! And it is no secret that both the frequency and magnitude of scams have only multiplied with every passing year! Back in the 1980s there were just eight scams; this figure grew to 26 in 1990s, and now this has seen an exponential increase to touch a figure of 150! Such has been the abysmal and ulcerated level of ethics that the vice-laden political class has left no stone unturned to extract their pound of flesh from every possibility, so what if it is animal fodder, coffins of soldiers, or real estate meant for martyrs. So if on one hand there is this feloniously devious Chief Minister who sells the resources of our most mineral rich state as if the same were his own, then on the other another bootlegging Chief Minister goes about misappropriating residential flats which were meant for Kargil martyrs. And if this wasn’t enough, a double-dealing man who considered Indian sports as his personal fiefdom, through CWG, misappropriated tens of thousands of crores. And even if all this was not enough, a knavishly malfeasant politician at the national level, without caring for national security, sold telecom licenses as if he owned them, at an iniquitous price which cost the exchequer and the nation Rs. 1,70,000 crores – with no trace of this money yet. No wonder, when Global Financial Integrity (GFI) in its recent report concluded that around $19 billion is lost in India as black money each year, we all know where the money comes from.
Although as per Transparency International, a whopping 60 per cent of the total black money generated is routed into the electoral process, the obdurate politicians alone do not monopolise this obscene, unending appetite to plunder every bit for their personal gains – they have also systematically created a flaringly vitiated environment wherein even industrial houses can have their own pounds of flesh. Otherwise, knowing the blatantly debauched leakages that repeatedly occur, why would the Indian government still stick to a no-tax-for-long-term-capital-gains policy? Taking advantage of this, degenerate promoters have been raking in crores of rupees by offloading their stake in their own covinous companies and siphoning them off to various surreptitious tax havens across the world! It is almost a known fact that most of this money is getting parked in countries like Mauritius, Cayman Islands, Bermuda, British Virgin Islands or are stacked in banks of Scandinavian or European countries. And now, even a few Asian countries like Thailand, Singapore, Hong Kong and Macau are emerging as new destinations for parking illicit funds for Indians. And why should they not – it is free money for them!
If this is not a reality, then how does one justify that Mauritius ranks first among all countries in Foreign Direct Investment (FDI) inflows to India while its national income is just $8.7 billion, and its investment in the banking sector is just over $1.5 billion? More interestingly, Mauritius has more than 9,000 offshore corporate entities, many of them having roots connected to India. Under Indo-Mauritius treaty, a company resident in Mauritius can sell shares of an Indian company to escape taxes in India as there is no policy of capital gains tax (CGT) in Mauritius – the gain thus escapes tax altogether. Similar are the cases with almost all other nations that have differential taxation. In 2008, around $3,600 million was routed to Singapore and around $2,200 million to Cyprus from India. In April 2009, the Canadian High Commissioner to India acknowledged that against the official Canadian investment into India estimated to be around $239 million, the actual figure would not be less than $10 billion. India loses nothing less than a staggering $1.5 billion collectively, mainly due to individuals trying to dodge taxes back home. Many promoters of Indian companies exploit firms located in tax havens to fraudulently augment their share prices domestically, illegally channelise funds into tax havens and then later bring them back as FDIs and other forms of investments. And if all this is not true, then how do we justify that the total market capitalization of a handful of companies listed in BSE and NSE is more than the Indian GDP? And mind you, a couple of them in this list have market capitalization figures that are almost 25 percent of the Indian GDP!
This saga of blatant extortion and shameless plundering does not just stop here. Whatever is left in the form of putrefied morsels is also being scavenged, starting from the conscienceless babu to the amoral peon, and that too from the poorest of the poor! A study reveals that 50 million BPL (below the poverty line) households pay bribe worth Rs 9000 crores to get their work done. So be it the police, health education, employment in form of NREGA, land records etc – every possible avenue is exploited to extract money for personal gains and then siphoned off to offshore locations!
It is so unfortunate that nations like Switzerland are thriving on our money; and today, when they are ready to cooperate, the perfidious government is reluctant to get the black money back and disclose the names of the perpetrators! Understandably so! In fact, nations like Germany went to an extent of paying $6.3 million to LGT group in Liechtenstein for purchasing bank data to track down tax evasion. In 2009, US tied up with the Swiss government in a move that allowed US to access to 4,450 secret accounts in UBS. In spite of 18 years of long struggle, Nigeria managed to get back $700 million. Similarly, Philippines got back $700 million and Mexico $74 million!
It’s time now for India. The government has made a big statement that the black money lying abroad belongs to Indians; and that it will be brought back. Sadly, all this is nothing but mere suppurate lip service. If the government is serious about the issue, it should give a deadline and put an honest breed of people to work independently to get the money back. On one hand, the government claims that they say they will get it all back. On the other hand, while the Swiss government is ready to share the data of money kept in accounts there, the censurable Indian government is quite shamelessly not ready to ask for those details. Clearly, if the government had been serious about this, they could have easily got all the details by now. My question is, what is the reason why the government is not getting the money back? Are they aberrantly waiting for all black money-holders, including themselves, to shift the money to Dubai where the secrecy laws are still very stringent? Evidently, once they have successfully managed that, perhaps then they’ll display ubér haste in asking the Swiss government to reveal all – when the Swiss government will be left with nothing to reveal. The coming times will give the readers the answer. But one thing is for sure. If this jaundiced and venal government doesn’t take action soon, the time is not far away when an Egypt will happen in India. And I hope the peccant people in power are listening.

[B27] DR. ARINDAM ON INDIAN ECONOMY

Compared To Mukesh Ambani, Even A Bill Gates Is Insignificant And Powerless. And Now, The Coming Together Of The Ambani Brothers

31 January 2014 | Dr. Arindam on Indian Economy

WILL ONLY MAKE THEM MORE POWERFUL! I was in Cannes this year for the annual film festival! The day after the inaugural show, was a symposium on Indian flms. While speaking at the symposium, I said that the West better take India very seriously as sooner or later, in any case, Indians or Chinese will be owning all the major Hollywood studios, since they are mostly bankrupt and on sale. At the end of my speech, most people who came up to me seemed disturbed by my statement! Many asked whether I really meant that statement!
Well, I surely meant that! One look at the global rich list today and you will see how it has been stormed by the Indians. The reasons, as I said in one of my previous editorials, is of course more to do with the way Indian governments have helped privatise national resources than encourage real brand building abilities – (‘Blood billionaires. Scam Billionaires. Indians storm into the Forbes billionaires list’; December 23, 2007). The best proof of my statement is that when it comes to the world’s top hundred billionaires, we have a lot of Indians; but when it comes to the world’s top hundred brands, we don’t find a single brand developed by Indians. However, that, I believe, is going to change – at least partially. Tatas already own Jaguar and Land Rover. And they are seemingly turning the units around. So even if we didn’t create brands thanks to the Kalingas, Singurs and Poscos, our industrialists have been made billionaires by successive governments so that they can now buy up readymade brands and build upon them.
The point, however, that I want to make today is the significance of the coming together of the Ambani brothers in the midst of this situation. Those in the know of the Reliance empire would know that till Dhirubhai Ambani, the founder of the Reliance empire, was alive, one hardly saw much of Mukesh Ambani. While insiders say he used to do the work, it was left on Anil to be the public face; and it worked very well. From a Bollywood star wife to his flamboyance, he was perfect for media to thrive upon. In fact, in the public documents also, one will find notes by Dhirubhai which make it amply clear that he trusted Mukesh more when it came to business activities. Post his death however, the brothers parted ways. And while Mukesh grew and had the right relations with the government as well, Anil went through a rough patch culminating into the latest courtroom drama on the supply of gas for his power projects and the eventual patch up between the brothers mediated by their mother! So what does this mean for India and the world? For starters, one thing is now almost certain that post the mutual cancellation of non-compete agreements, there would be no need for Mukesh to hunt for other ways to be in the telecom business – his long cherished dream. It’s widely speculated that whichever international player shows interest in Anil’s telecom business, it’s finally going to go to Mukesh. Same will be the case with the financial arm of ADAG. With that, it will be almost like old times. Mukesh will run the big businesses. Anil will own them along with him and would be left free again to concentrate on things he enjoyed – films for one are high on his agenda; one reason for Hollywood studios to beware! It also means that together now the brothers will be more valuable than ever before. Mukesh more so!
To understand the real value of Mukesh and the significance of my headline, here are some facts. The Mukesh Ambani group’s total turnover is $44.6 billion (Anil’s is another $14 billion). Mukesh is ranked just two ranks below Bill Gates in the Forbes billionaires’ list, at #4 with a personal net worth of $13.7 billion (Anil is at 36th). Compare it to Bill Gates’ Microsoft , which has total revenues of $58.5 billion. Gates himself has a net worth of $53 billion; and apparently Bill Gates still seems richer than Mukesh or so thinks Forbes. But what it forgets is that compared to the $14.4 trillion GDP of United States, Bill Gates is just a minor fraction. But the Ambanis put together, are a staggering 6% of India’s GDP of $1.09 trillion – Mukesh alone 4%! Add to that a few more facts. For Bill Gates, everything is in white! And he is hardly wielding a fraction of political power. In India, Mukesh virtually runs the nation, owns virtually the entire media in reality and most politicians are only too pleased to work as per his will... While Bill Gates is just a big businessman in USA, Mukesh Ambani virtually runs India – the nation which is going to dominate the world in the next quarter of a century. Those who think Mukesh is just the 4th richest man in the world don’t know the reality yet. And reality is only going to now grow bigger with the coming together of the brothers. Bill Gates and Warren Buffetts will soon become insignificant in this new world order – at least as far as wealth and power is concerned. And it’s time the world wakes up to this fact!

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