Why Raghuram Rajan not fall prey to economics algorithm?

 

 

 

  Very recently RBI Governor Raghuram Rajan has kept interest rates constant while decreasing Statuary Liquidity Ratio (SLR) to 22 per cent. As Urjit Patel Committee report has said in their report that inflation targeting should be the first priority of central bank. However, RBI has been very proactive in its approach. The legacy initiated by former RBI Governor D. Subbarao is still continuing. The need of the hour is to reexamine the possible solution for controlling Inflation that have been out of control for central bank. 2010 nobel prize winner in economics has done good work which in brief concludes that the impact of policy changes is realized after some time lag. This has to be taken in Indian case as interest rates have been very higher compared to her counterpart in other emerging economies. This has serious implications for economy. Not only higher interest rates are a cost on profitability of corporates but planned investment is also postponed in event of bleak profit anticipated. When there is decline in investment, then fewer projects are materialized and fewer jobs are created. For a country like India that has entered demographic dividend phase, it would be very bad if the youth entering workforce do not get jobs. Engineers after spending lakhs of bucks are underemployed barring a few passing from elite institutions like IITs and NITs. This slowdown is captured by GDP data also. At 5 per cent level we are at the bottom.

   With the change of guard at the helm, global investors have been flooding the market with capital. The expectations are huge this time and they have been in wait and watch mode and after the election results were out they panicked and we saw explosion in share market that has broken all past records.

   How can RBI participate in India’s development story makes a point. There are many countries that have made financial inclusion a basic right while more than half Indians still lack access to basic banking facilities. The impact of hike in interest rates would be very small in event of undeveloped financial market. This is the reason even after several rounds of increasing interest rates it still remains out of control. To put it simply the impact of transmission of policy rates on price rise has been far below expectation. Now if we examine the composition of consumer price inflation it becomes crystal clear that it is led by prices of food commodities that fluctuate round the year and for the past few years have been elevating consistently. New strategy has to be devised to fight Inflation to bring respite to common man. Central govt. and state govt. have  to lead from the front in this case. Many plans have been discussed in recent budget for the supply chain management. In India, more than 40 per cent fruits and vegetables gets spoiled before they reach ultimate consumer. If we can store these perishable commodities in cold storage, then we can realize incremental supply in market of these commodities and price will come down.

    The most severe impact of inflation lies on bottom of the population who see their real income declining. In event of no increase in real income they shift their consumption to fewer commodities. A section of population decrease food expenditure that has serious impact on their nutritional status. Although there are many entitlement schemes in place but to maintain a balanced diet, one has to eat many other commodities. When the price of such essential commodities increases then it is obvious then children, women especially the most vulnerable group would have to satisfy with fewer quality nutrition. In long term, it would be a tax on their future potential.

   RBI has to be very careful in deciding interest rates. The priority of central bank is not only to achieve price stability but also contribute in the growth and development of nation economy. The most pressing challenge is to create good quality jobs to youths who are entering in huge numbers. Many have spent a huge chunk of parental income and wealth expecting higher income. But to regret this is not happening in most of the cases.

  A decrease in interest rates would bring the cost of borrowing down. Corporates would be incentivized to invest more and more jobs would be created. Those sitting at the helm must understand this and not fall prey to the algorithm of economics that dictates to respond to some data only. I hope in coming days policymakers must understand this and more long term measure are adopted that would bring cheers to everybody and development with dignity becomes a benchmark.

 

 

 

 

Why Gandhism is more relevant today !

Ghandhism –  what is it? To be simple teachings of M K Ghandhiji who played an instrumental role in let india attain freedom. His ways , approach to anything was completely different.  We know much about him via  history texts. Here I would like to concentrate why we need to incorporate his views in our working culture, understanding.
1. As an Economist , when I view the where the world stands today-  Every country is just busy to increase their incomes at a faster rate (GDP Growth). And all this has been done without any consideration for our environment.
    One example will make it clear. In the globalised world today, there are talks of level playing field as Thomas Freedom talks in his book ‘The World is Flat’ now the scenario has become skewed towards EMEs ( Emerging Market Economies) like china, india , Brazil, South Africa and other nations. These nations are producing the same product at a factor of cost what it cost much in developed countries.
Result -exploitation of resources at a greater pace. Poors are still exploitated. Though they get job only beacause they provide cheap labour. For example for every I-pod sold for $250 a chinese labour gets only $8  . While the share of others non labour is much higher. Who deserves share equal to their contribution does not get the fair share.
     Globalisation have fastened the pace of rapid consumption.that needs intensive use of minerals.Our techniques are still based on fossil fuel consumption.
2. IPCC report in 2007 made it crystal clear to awake to the changing environment sign.otherwise everybod will suffer.
   But it is the rich , big economies with large amount of pollution have done huge damage to our environment and poor countries like Maldives and several others are at a brink of extinction. The sea level rise will flood these island nations. These innocent countries are goin to pay the price,
3. Although Bottom of the Pyramid promise a greater potential for global consumer companies. They have started making consumer goods for them even for Re 1.their packagings are plastic only that pollutes environment. In less developed countries the sanitation techniques are very poor. They end up in transferring the waste only from land to rivers, rivers to sea .
4.The whole edifice of Human development is being built on income parameters that require more and more to earn no matter how. A proverb will make meaning more clear-it does not matter whether it is a black cat or white cat , until it catches rats.
   We are concerned about cathing rats irrespective of techniques applied.
5. Are we selfish?   yes, to a greater extent , we are.
Our rivers like Ganges  the most amzing river of the world whose water never spoils ..what happened. It has been made completely spoilt. Scientists are sugesting not to drink its water as it contains pollutants more than the permissible limit.we have added loads of sewage, wastage of our cities are dumped.i find no city in india ,where Ganga passed tangently, does not add pollutants to it.
6. Quality of air in our regions of most developed region too is extremely poor.our fuel guzzling vehicles have made it unfit to inhale.we have not spared anything even underground water is polluted. You have to use a good quality water purifier to make it fit for drinking. What about the poors who can not afford a water purifier? Why poor will be suffering from malaria, dengue, diarrhoea and several disease that simply originate because of lifestyle pattern of some rich elites..
    It is the poorer section of society that has suffered the most and still at greater danger of risk. Their future is insecure. Development has done some good to riches at double the cost to poors.
    Gandhiji’s Teachings are a way foreword to take the lagged behind section of our society. Sustainable development talks for future generations. We have to be concerned about the present generations too,  who are paying the price.
    Think on it. you will be feeling more guilty. There is a whole magnum opus that could be written to intensify the argument.
  At last, I can only say that gandhiji’s teachings are much more relevant today.instead of remembering him as a regular convention it would be better if we follow his ides.it will make impact on society -gains to poors and our mother earth.

Poverty in India – an analysis

Poverty is one of the most hotly debated issue. It has become a headache in the minds of govt. belonging to developing countries. Billions of dollars are spent on poors to move them out of poverty but do these efforts really bear fruit..what are the stimulus that gives the best result can only be known after doing several types of doses like education, healthcare facilities, micro finance, cash benefits, free food grain or at subsidised prices and much more benefits that accrue to poors . as we see around us. even we ourselves too gives alms to poor beggars sometime.
as a matter of fact first one needs to know what a poor is.. for determining poverty we have to draw a poverty line that demarcates poor from non- poors. over the years there has been several modifications in the poverty line . world bank has a poverty line , india has a different poverty line. our concern is the recent one given by the Planning commission that says rs. 27 per head per day are sufficient for a person to live. above which he is not poor in rural area . the corresponding criteria in urban region is rs. 32 .
alright , whether one can really live in 27 rs. is a matter of debate. majority will definitely laugh over this foot in mouth statement over how can one even eat two squares of meal in such a meagre amount.
also we did have a poverty line based on calorie intake that says a person living in rural area needs atleast 2400 calorie and 2100 calorie in urban areas. if below this they belongs to poor category.
because of inflation , over the years there has been upward revision in the poverty line based om the purchasing power.
one thing i doubt is that china reduced people in poverty by 220 million between 1978 and 2004. whole applauded their achievement as biggest poverty reduction i world history. India too reduced the corresponding figure from 407 million to 269 million. a fall of 138 million that too just in 7 years from 2004-05 to 2011-12 during the rule of UPA. a common man better knows how inflation has been consistently eroding his living standard. there was no celebration at all. no one cheered our achievement.everybody knows that govt. has manipulated the real picture by distorting data.
all i can say is that there has been an increase in nominal income of people over the years. people are spending more than they did before. even a vegetable seller keeps a cellphone. various sign of luxury you may say have become a habitual partof our life.
Poverty reduction has always been the top priority of every government coming in power. some of the traditional measures they adopt are as follows.
1. one of the most requirement of human being to live alive is food. govt provides subsidised food grain through PDS hoping that they will get plenty of nutrients and be healthy.
2. another measure much used in practice is Education. education can transform ones living completely. history is testimony to the fact.govt. has opened various schools to provide education for free to poor people. even med day meal plan too runs parallel. children who come to school gets a free lunch.
3.providing free healthcare to poor people has been a long cherished dream of govt. all i can say is that they have succeeded in building a mortar building which they call primary health centre. Yeah, off course Doctors comes there ..
4. for housing Govt. gives cash to poor so that they could build their house.
there are thousand of schemes running to uplift poor in our country to make their lives better. this was the theory part.
now some empirical evidence , firstly PDS majority of food grains founds its way to markets not the poor needy. it is full of leakages.
second , education – Pratham an NGO that carried an exercise covering 7 lakh children wanting to know the status of education. and finding were seriously strange…a fifth standard student could not do the mathematics of 2nd class. what more can you expect.. the figures were really high.most of the children do go to school but the output coming is not encouraging.Teacher absenteeism is rampant.
as far as health sector is concerned it is in the most dilapidated state. doctors hardly comes to rural areas. even you can not get a doctor for particular ailment . all you have is an allrounder who is arely seen.
one more Employement Guarantee scheme that gives 100 days of work to rural manual labour. the findings of CAG report were worth attention. on an average Uttar Pradesh provided work for 17 days per person.
this is crystal clear now that empirical studies have found severe lacuna in all the efforts of govt.these are the measures same again and again that we are adopting since independence.
one sector that was missing that did not provide helping hand was the banking sector. in the last years micro finance has changed the lives of poor . in Bangladesh , Prof. Yunus has effectively changed the lives of million of people uinder poverty. they are now making enough to lead a decent life. score of examples from India too that provides a ray of hope.

FDI In Multibrand Retail In INDIA:Some Vital Issues

FDI IN RETAIL : SOME VITAL ISSUES

 

 The most burning topic nowadays, in fact buzzword- FDI In Reatail has stalled the proceedings of our parliament. Well, the path is clear now as both houses have voted in favour of welcoming FDI. In single brand retail 100% FDI is allowed while only 51% is allowed in multibrand retail. There are several concerns, ifs and buts.gains and losses. Let us have a look on these concerns.

                The world is flat as said by THOMAS L. Friedman. India is not alien to this level playing field argument. Globalisation is growing by leaps and bounds after the invent of WWW,  decerease in prices of telecommunication services ,transport everything that assist in anyway in exchanging of goods and services.

               After 1991 economics reforms, India has grown really astonishingly high catching eyes of global investors. Who wants to be a shareholder of this remarkable journey. Various think tanks have proposed in their findings that India may surpass the economies of United States and China in near decade. Case of India is unique in itself given our demographic advantage. And no sooner in future we are going to face the shortage of labours. That means for a considerable period of time we are going to have a consistent supply of young labour. Unlike in china, where one child norm, might have been successful in population control but over the years it has led to decrease in supply of young labour. China has been growing at high rates for decades . They have been reaping the benefits of large population. Now,  it is India`s turn  , who has to take the lead , provided we clear certain hurdles, gross inefficiencies in our economic system. Our concern is about distribution sector .means how a product manufactured in industries or foodcrop grown in farms  reaches consumers? The answer is retail.

   Basically , retail play a critical role in this supply chain. India `s retail sector is estimated to be worth $410billion in value terms. While it employs nearly 40 million people, second largest after agriculture. Retail is of two types :1. organized retail. 2. unorganized retail. Organized retail is subject to sales taxes, licence to trade etc while unorganized retail is where no sales taxes are paid, any body can easily open so called kirana stores. They form the bulk of retail comprising 98% of the workforce involved in retail business.while organized sector provides employment to only 2%. These figure for U.S and China stand at 85% and 20 % respectively.

   Therefore which one is better organized or unorganized . let us see-

1. first of all, every person wants to have maximum enjoyment and minimum pain. For this they should be able to able to fulfill their basic needs first –food, clothing and shelter.
2. afterward a consumer thinks of spending money on other necessary goods that have become an indispensable part of our lives.

Infact , everybody has unlimited wants, we want to buy more and more, but money is the constraint.what to do? There are two options:1. increase your income or 2. decrease the prices of commodities. That’s not easy as easily said. But there is a way to decrease the prices of commodities . how? If we observe the organized model of global retail  like walmart, the answer is a big yes!

   Indian consumer can buy more at cheaper rate with same amount of money. What is wrong in that? Is there anybody who suffers loss because of  gain to a huge 1200 million consumer class.we will see it. First lets look at foolowing facts-

1.      40% of foodproduction don’t reach consumers  due to inbuilt inefficiencies and wastage in distribution and storage. 50 million children in India are malnourished.food often rots at farms, in transit or in antiquated state –run warehouses.  Cost conscious organized retail companies will avoid waste and loss making food available to the weakest and poorest segment of Indian society while increasing the income of small farmer. Walmart for example, since its arrival in Indian wholesale retail market , has successfully introduced “Direct Farm Project” at Haider Nagar near malerkotl in Punjab where 110 farmers have ben connected with Bharti Walmart for sourcing fresh vegetables directly. Thereby reducing waste and bringing fresher produce to Indian consumer.

2.      farmers suicide is not a breaking news. It is a usual phenomena .why?  mostly of them were unable to pay their debts. Death means no debt. You are relieved. But till when? Indian farmers wold be adopting the same tactic. The aftereffects are  really horrible on their family. Even govt. too came several times to pay there debts or some sort of cash transfer. Theses are temporary remedies. The solution is somewhere else. Before that we must  see what is the cause of their sleepless nights.

             As per latest economic survey agriculture contributed a minuscule 13.9% in GDP( gross domestic product). While their share in workforce is almost 60%.

Also service sector accounts for more than 60% of GDP.

         Actually , our supply chain for farms product move in tandem with 5:10:15:20. there are foue segment in this process. A Poor farmer sells crop for rs.5 to a dealer who resells it for rs. 10 in wholesale market. They sell it for rs. 15 to so called kiranastores . who sells it to Indian consumer for rs. 20. this sounds absurd in the era of globalization. Distribution is taking away 3/4^th of income. 40 million people are taking away 3/4^th of income and 1/4^th goes to 720 million. Further food inflation has been at galloping pace .the basket of goods that we used to buy last year now commands higher prices. Rather increase your income or decrease consumption.

       This is gross inefficiency in supplychain. Why middleman who has done nothing to add value to the farm product in physical terms  would take away 3/4^th of prices. This is gross injustice.

Looking at organized model of global retail gives us much respite. Even if they buy for rs. 10 and sells it for rs. 12 making marginal profit of only rs. 2 is not a bad idea. Further with their technical know how of coldstorage we might bring down the quantum of foodcrops that rot before they reach market.it will seriously halp in taming food inflation.

   Walmart,Carrefour,Tesco ,Target,Metro,Coop are some of the 350 global retail global companies with annual sales over $1billion.these retail companies have operated for over 30 years in numerous countries. They have not become monopolies. Competition between walmart like retailers has kept food prices in check. Canada credits this very low inflation rates to walmart effect.

 Further , 51% FDI limit in multibrand retail ,nearly half of any profits will remain in India .which shall be taxed. reducing Indian govt. budget deficit.

  So far it really looks amazing how better our farmer would be economically and purchasing power of consumer too would rise as they can buy more at cheaper rates than earlier.

   India`s economic growth has dipped below 6% level. Why? Marginal increase in production are slowing down because of lack of investment. In recent years , cost of borrowings have risen up making profit prospects looking bleak so entrepreneurs are holding back investment in setting up new firms. RBI  is adamant on keeping interest rates @ 8% per annum.D.Subbarao (RBI Governor ) is firm on keeping inflation rates in check saying when inflation rates comes down we will decrease interest rates. After consequence of high interest are disgusting . given the slowig of our economy  less employment opportunities , we will be punching below our weight. Therefore deduction in inflation rates holds the key to revive up Indian economy that seems possible with the entry of global organized retail as has been the case with Canada.

   These are the benefits that seems with the coming of FDI in retail . is there any dark side too?  Yes. Many of the 40 millions will be unemployed .how much there is no anonymity as such .but we may take take the case of U.S. Walmart employs 1.4 million people in U.S. population of about 300 million and India`s population of about 1200 million, if walmart like ratail companies were to expand in India as much as there presence in U.S.stores, Walmart alone would employ 5.6 million Indian citizens in addition . millions of jobs would be created during the building of and the maintenance of retail stores,roads ,cold storage centres, software industry, electronic cash registers and other retail supporting organizatios instead of job losses. Retail reforms are likely to be massive boost to Indian job availability.

 It is quite clear that there would be job losses but how much will be matters. Here is case study of china that may help us in understanding the fact.

 

 

Impact of organized retail on unorganized retail(case study – China)

Myth : organized global retailer eat up local retail chains including mom and pop stores.

 

Truth: China, which brought in global retailers like walmart in 1996, has just about 20% of organized retail meaning the argument that unorganized retail gets decimated, is fallacious.

1. FDI in ratailing was permitted in China for the first time in 1992. foreign retailer were initially permitted to trade only in six Provinces and Special Economic Zones.Foreign Ownership was initially restricted to 49%.
2. Foreign ownership restrictions have progressively been lifted and , following China `s accession to WTO ,Effective December 2004,there are no equity restrictions.
3. Employment in the retail and wholesale trade increased from about 4%of the total labour force in 1992 to about 7% in 2001. the number of traditional retailers were also increased by around 305 between 1996 and 2001.
4. in 2006, the total retail sale in China amounted to USD 785 billion, of which the share of organized retail amounted to 20%.
5. some of the changes which have occurred Iin China following the liberalization of its retail sector, include:

.over 600 hypermarkets were opened between 1996 and 2001.

.the number of small outlets (equivalent to kiranas) increaded from 1.9 million to over 2.5 million.

.employment in the retail and wholesale sector increased from 28 million  people to 54 million people from 1992 to 2000.

 

Effects of FDI in retail  on traditional market in China

 

Type	No. of stores in 1996	No. of stores in 2001
Traditional	19,20,604	2,565,028
Supermarkets	13,079	152,194
Convenience		18,091
hypermarkets		593

 

Source: foreign Direct Investment in Retail –ICICI Bank(2004)

 

  Thus the above discussion and case of china suggest that it is too early to predict the erosion of mom and pop stores in India with opening of multi-brand retail sector in India to foreign investors.

      China`s case lead to extrapolate that in INDIA  we may end up with more kirana stores in absolute terms. As population rises , income rises so will be the no. of stores .even if there is employment threat to 400 million traders than J.M.Keynes makes our argument much stonger how? Lets see..

    There is no denying that prices will cool down with the arrival of global organized retail. That increases the purchasing power of Indian consumer. That means now he can buy the same basket of goods with lesser money than the last year. Surely remaining money would be spent for buying other commodities . that means more is demanded in quantity terms. Industries will have to produce more. For that , they will set up new firms , employ more people and supplying the goods to market. We see an increase in the quantity of goods . so employment problem is solved .but.. yeah there is a big but..there is a threat from nonetheless our neighboring country China. How….U.S. is suffering .

U.S. BASED Walmart was responsible for $27 billion in U.S. imports from China in 2006 and 11% of the growth of total U.S.Trade deficit with china between 2001 and 2006.(Scott-2007).over the years , in a bid to provide more and more cheaper good to U.S. consumer ,Walmart has started to buy goods from China resulting in two lakh job losses and growing trade deficit.(Scott-2007)

U.S organized retail `s share is somewhat 85 %.while ours is only 2%.given the distance between U.S and china , China has supplied them cheaper goods covering the cost of transporation. Many U.S. based entrepreneur have shifted their manufacturing base from U.S. to China as it is cheaper to make there.resuting in  direct job losses to U.S. natives.

     What significance it holds for India ? Suppose walmart starts buying cheaper variants from China as they did in the case of U.S. there is  a serious threat to India industries. Already given 2% organized retail , china has penetrated deep in our consumer market. After arrival of organized retail the aftereffects seems much more horrible for Indian industries.

Is there any remedy ..yes. before 1990s domestic industries were protected from the international competition as goes by the Infant Industry argument saying domestic industries are to be protected for some time otherwise foreign companied would never let them grow , given their superior technical know –how  and economies of scale. This arguments holds prominence. There were many apprehensions during the economic reforms of 1991. and rest is history. Indian industries have not only come out better afterwards but built global repute. Software companies , pharmaceuticals and several aother are taking lead. Even some Indian companies bought foreign companies too. Now they are operating on global basis.

 Same holds for the same threat that stems from china . indian industries will have to be more competitive , provide more qualitative goods at cheaper rates. Reaching more economies of scale.

    So we see that there are several positives and negatives of FDI in retail. And also benefits and gains  outweighs the losses. We welcome FDI in reatail , that supplement our farmer`s income , leads to decrease in wastage of perishable goods. And also compell Indian industries to strive hard for innovation otherwise they would go out of business. It has come , parliament has given nod. In tandem we see GDP of India rising much faster. Than many extrapolations of several thinktanks may hold true.and the dreams of our forefathers would definitely be realised.