Vultures cannot harm a strong economy.

"Investing often creates moral dilemmas over goals: Should we aim to do well or to do good?" asked Prof Ricardo Hausmann. Returns on JP Morgan Emerging Market Bond Index Plus depend heavily on the events in Venezuela. "The reason is simple: while Venezuela represents only about 5% of the index, it accounts for about 20% of its yield, because the yield on Venezuelan debt is about five times larger than that of other countries in the index, a reflection of the huge risk premium that Venezuela faces." Which means the worse the economy the more the risk premium and more the gains for the bondholders. What is going on in Venezuela? The economy has collapsed, inflation is expected to be over 700% this year and the currency, the Bolivar fuerte, or the strong Bolivar, is trading at 5383 to one dollar. It was officially fixed at 2.15 to the dollar in 2010. Why is it such a a mess? Because of socialist policies of Hugo Chavez, now dead, who nationalised banks and industries and embarked on massive redistribution of land and wealth to the poor, financed by oil revenues. People are protesting against President Nicolas Maduro, who has responded with violent suppression, with 60 people killed by security forces. Remarkably, some people still support Maduro and make excuses for his brutality. Meanwhile, US vultures are picking the meat out of the moribund economy by purchasing billions of dollars of Venezuelan bonds. US funds have a history of playing this game. In 2001, Argentina defaulted on its debt of $93 billion. However, it managed to restructure its debt, with bondholders agreeing to a payment of 30 cents to the dollar. Some hedge funds bought up some of the debt and went to court insisting on full payment. This was upheld by US judges, who blocked settlement with other bondholders until the vultures were paid in full. In India, Air India is a clear example of socialist control of a business. The company has a debt of around Rs 500 billion despite the government giving it Rs 170 billion of taxpayer money to keep it going. This is because civil servants, even if highly educated, have no understanding of how to run a business. The CBI has reported irregularities in its functioning. Why blame civil servants when politicians misuse their control over the airline for personal benefit. Yet, even now some people are calling for Marxism, by disguising it as "state capitalism", citing profit growth at public sector banks without mentioning the huge bad loans incurred by the same banks. If you kill the economy you cannot stop vultures from gathering.

Exuberance maybe irrational but could still be right.

Lack of volatility is the biggest danger to stock markets, wrote Dean Curnutt. Many events that would have resulted in a significant fall in share prices are being shrugged off. North Korea testing missiles, a recent cyber attack affecting over 100 countries, and Donald Trump's troubles at home would have caused prices to fluctuate widely in normal times but now they cause hardly a ripple. "Of all the dangers in the world of finance, the enduring low levels of market volatility is the most significant. How quiet is quiet? Recently, the six-month realized volatility for the S&P 500 dipped to 6.7%, lower than even the period leading up to the financial crisis of 2008-09." Why is it dangerous? "The result is an inability to appreciate how quickly marker conditions can change, especially as trading strategies that capitalize on quiet markets become vulnerable to unwind, serving to amplify a risk-off event." Prof Nouriel Roubini enumerates a list of global events that could trigger a crisis, but are being ignored by the markets. Several wars are being fought in the Middle East but there is unlikely to be any shortage of oil. Economies which are not growing, such as Russia and Ukraine, are not large enough to cause market disruptions globally and there is no prospect of a war between major powers. But, perhaps, the biggest reason is huge flows of money into funds. "They simply put the money received to work in passive fashion, without evaluating the risk/return trade-off. The flows themselves are a factor in the positive returns and the low volatility that, in turn, attract additional flows." So, it is the money going round in circles that is supporting the stock markets. What happens if the faucet is turned off? The Federal Reserve, has been too timid in raising rates, which has built up an asset price bubble and will result in a bust when monetary policy catches up, wrote VA Nageswaran. David Rodriguez, warns of warning signs flashing over both the Dow Jones and the S&P 500 as retail investors are selling out. The stock markets in India are also at record levels. The economy is growing at over 7% so there is nothing to worry about. The high value of our stocks is because of very high global liquidity, wrote Nageswaran. Indian banks are weighed down by bad loans which means they are unable to lend for new projects. Many banks are hiding the severity of their problems, wrote Andy Mukherjee. We make better decisions because we are irrational, wrote Olivia Goldhill. But markets are supposed to be rational, so what happens now?  

Can we be a little bit digital?

The Prime Minister has been pushing people of India to give up cash and conduct all transactions through digital payments. All anonymity will disappear as people switch to digital payments, which will end corruption by completely opening up our lives to government scrutiny. But as notes come back into circulation, following demonetization, people are going back to cash because it is easy to use, there are no charges and no danger of hacking. But how far does the government want the people to go? There are a number of crypto currencies, starting with Bitcoin in 2009 which can be used to make payments. Crypto means hidden or secret, because these are not controlled by any government or central bank. Naturally, these currencies are preferred by criminals because of the anonymity they provide. A delicious irony because that is precisely the reason why Modi wants to get rid of cash altogether. For the billions of people who are computer illiterate it is impossible to understand how any currency, which does not exist physically, can have any value. They can apparently be mined online by using blockchain. The Winklevoss twins in the US think that Bitcoins are more valuable than gold and want to build a currency exchange using Bitcoins. They also want to start an Exchange Traded Fund, or ETF, to allow people to take advantage of its potential. In March, the US government regulator, Securities and Exchange Commission denied permission to the twins to set up an ETF which sent the price of Bitcoins tumbling from $1,300 to $1,100. How the regulator will supervise such a fund, where investors are unknown, is difficult to foresee. However, recently the price of Bitcoin has jumped to a record $2,700, while in South Korea it is available for $3,100. The jump in price is because the Japanese government has recognised Bitcoins for legitimate transactions. In Japanese yen there is a $300 premium over the price available in the US. In 2014, Mt Gox, a Bitcoin exchange, in Japan ceased operation, causing losses to a lot of customers. Like many digital startups many Bitcoin startups have also failed. While Japan has accepted Bitcoins as legitimate authoritarian governments are uncomfortable with its use. In February, China shut down two exchanges to stop flight of capital, while the Reserve Bank warned Indians not to use this currency because it has not been authorised. But that is precisely why it is so attractive to its users. Modi wants us to go digital, but, like pregnancy, you can't be a little bit digital it seems.

Enjoy while it lasts. Who knows the future?

"Is the Fed behind the curve? Alternatively, has it done too little too late?" asked VA Nageswaran, in an article on monetary policy in the US. The Federal Reserve is usually late in raising rates, which causes a boom in asset prices, and when it starts raising rates "it overdoes it because it is already late in doing so", resulting in a bust. This can be seen in the dramatic highs and lows of the Federal Funds rate, rising to a high of 20% in 1980 and falling to a low of 0.25% in December 2016. These rates coincide with the boom/bust cycles in the US economy, showing the inability of the Fed in keeping the economy on an even keel through its monetary policy. When interest rates are too low assets prices rise to extremely high levels, as people invest on borrowed money expecting prices to keep on rising. "Where the Fed has always erred -- including in this cycle -- is in allowing asset prices to get way ahead of fundamentals." Headline inflation has risen to 2.1% from 0.2% in 2015. There is euphoria in India because retail inflation fell to 2.99% in April from 3.89% in March, the lowest in decades. However, core inflation, which excludes volatile food and fuel prices, was stubbornly at 4.9%. Inflation expectation, which is what people expect it to be, was 7.5% over 3 months and 8.8% over one year. This implies that people fear that food prices could rise if the monsoons are poor or patchy and fuel prices depend on whether wars in the Middle East stay confined or spread to involve the whole region. The Reserve Bank probably expect retail inflation to rise because it left interest rate at 6.25% but changed its stance from 'accommodative' to 'neutral', which means hardening in RBI lingo. Politicians love high inflation because it reduces government debt. The government expects to borrow Rs 3.5 trillion from the market this year, while gross borrowing, which includes repayment of previous loans, will be Rs 5.8 trillion. Borrowing to pay back previous borrowing would be silly unless the present rate of interest is lower than the previous one, which is why politicians are always pressuring the RBI to reduce rates. The RBI is trying to reduce money supply by selling bonds but is unable to do so because of the enormous liquidity in banks, due to demonetization. The stock market is beating records almost everyday. The RBI is unable to raise rates to cool markets because higher rates will make the rupee stronger. It is already overvalued by 7%. A bubble maybe building up but who cares. People are feeling rich. Enjoy while it lasts.

Is the IMF forecast just whistling in the wind?

The International Monetary Fund released its latest World Economic Outlook till 2022, wrote Mohamed El-Erian. "The baseline for economic growth is essentially the same over the medium term, with slightly better shorter-term prospects; the risks are getting bigger and are tilted to the downside; and better national policy-making and improved cross-border coordination can lift prospects." The global economy will grow by 3.5% in 2017-18, rising to 3.8% in 2022, but advanced economies will grow by 2% this year, falling to just 1.7% in 2022. Developing economies will grow by 5%. Trouble is that the risks are "tilted to the downside". So, how to increase growth? "As the IMF points out, better economic measures at the national level, together with improved policy coordination at the global level, can boost growth, lower financial risks, counter excessive inequality and provide more conducive political context." People blame globalization for the increase in inequality as companies have shifted production to places where wages are are at slave levels and have stashed away vast sums of money in offshore accounts to avoid paying taxes at home. To counter the fall in growth rate central banks of the eurozone, Japan, Switzerland, Sweden and Denmark, a total of 23 countries, have adopted negative interest rates, which reward the rich to borrow, to buy assets, while people are penalised for saving money. This is reinforced by withdrawal of cash, as Sweden and Denmark have done. As usual it is being sold as good for the economy, but it is only increasing wealth for the rich, who can park their money abroad, while taking away the freedom of how to use their earnings from the people. Germans are having none of it and are hoarding cash at home. Countries in the middle east are suffering long periods of power outages everyday. This when the price of oil is low. There is rising danger of armed conflicts breaking out in many areas of the world, wrote Prof Nouriel Roubini. As if to prove his point ISIS militants have taken over the town of Marawi in the Mindanao Province of Philippines. President Rodrigo Duterte has declared martial law in Mindanao and the air force is bombing Marawi. Not all is bad news. Europe has rejected right wing politicians in recent elections, the economy is growing at 2% and banks are looking healthy, wrote Ruchir Sharma. However, Brexit is hanging over Britain where wages are static while inflation has increased to 2.3%. The IMF and Eurozone finance ministers cannot agree on a new bailout for Greece, so a Grexit could yet happen. The IMF forecast could be just whistling in the wind.

If humans cannot hack it AI surely will.

India is going digital. Every citizen has a personal 12 digit number based on photographs, prints of all 10 fingers and iris scans. The country will become cashless so that every transaction, however trivial or personal, will be on record and the Goods and Services Tax will ensure taxes are collected in the beginning, even if the goods remain unsold at the end. Everything will be online which, we have been assured, is perfectly safe. Trouble is that most people do not possess the laser like intelligence of our politicians and civil servants and so are totally bewildered. Price Waterhouse Cooper has already found many security gaps in the IT infrastructure of GST. We are repeatedly assured by our rulers that all the information on citizens is completely secure from hacking. Is it? Seems that a lot of foreign companies hold all the identity details of citizens. Over 4.8 billion customer records have been exposed by companies worldwide, since 2013. The National Security Agency of the US hacked into SWIFT, the international system of transferring money into banks. In turn, hackers got hold of the files and released them on the internet. No need to go to so much trouble in India. Bank data of over 10 million Indians is up for sale at the rate of 20 paise each. Indians are forced to link their biometric identity details with their bank accounts, which means they are easily accessible to whoever wants them. On the other hand, our officials may well be right that the identity details are fully secure. Why? Because terrorists can get their own biometric identity numbers quite easily. Why bother with hacking and forging when you can get your own 24 carat identity card directly from the government. Our motto is 'atithi devo bhava', which means 'a guest is god'. Including terrorists it seems. When the US government cannot secure its Social Security Number from identity thieves what chance do Indians have? Not much, wrote Sucheta Dalal. However, while our lives are open books terrorists are using encrypted phones which our genius officials cannot break into. They have sent one such phone to the US for deciphering. Why? When the US police could not crack an iPhone, belonging to the San Bernadino attacker, they paid NSO Group from Israel to crack it. Israelis seem to be masters of cracking into any phone however encrypted it maybe. Sending the phone to the US is just covering up the crime. Why? The answer is to build a robust and resilient cyber system which will protect our citizens. Human beings get tired but Artificial Intelligence can work day and night. Soon AI will be able to break any security. 

Saving water while producing power.

SA Aiyer strongly advised against any more nuclear power plants for electricity generation in India. Although he supported the George Bush-Manmohan Singh deal in 2005 he now thinks that nuclear power is too expensive and, after the Fukushima disaster, too risky. Westinghouse is bankrupt and Areva's 3G technology is a failure. Electricity generated from coal costs Rs 4 per unit while that from the recently commissioned Kudankulum 3 and 4 nuclear power plants costs Rs 6.30 per unit. Westinghouse will cost Rs 9, while Areva will cost Rs 12 per unit, definitely useless, considering that solar power was recently offered at Rs 2.44 in Rajasthan. The government has set a target of 100 GW of solar power capacity by 2022 so companies are bidding aggressively for massive contracts. Such low rates would would make thermal power uncompetitive and those plants may default on their loans, thus increasing bad loans in banks. Between 2010 and 2015, utilities in Europe wrote off assets worth 120 billion Euros. Ghosh and Prasad fear that the bids are too low and those who win contracts will suffer from 'winner's curse'. One expert has calculated that the cost of solar power was Rs 9 per kWh in 2016 while a group of experts predicted that it will fall to Rs 4.45 per kWh by 2030. India is heavily dependent on China, which dumps thin solar films at unjustified low prices, which has killed the domestic industry in India. Thin solar films need rare earth metals on which China has a virtual monopoly. Dust in the atmosphere will reduce solar output by 17-25%. Thermal power plants will become increasingly unviable due to competition from renewable energy and the pressure to reduce harmful emissions, wrote Vishwamohanan and Aggarwal. Solar power is not all it is made out to be, wrote Rosenkranz and Puri. A plant in Gujarat is operating at only 18.2% of its total capacity. "For obvious reasons -- night, monsoons, dust, storms, -- solar power is neither produced all day nor throughout the year. Thus, the total maximum capacity of a solar power plant is never met to its fullest." Since output will never match installed capacity our reliance on fossil fuels will continue. Prof Muddu of Indian Institute of Science has studied loss of water through 'evatranspiration'. India has 17% of world population and just 4% of water resources. 443 million schooldays are lost each year through water related diseases. Some places, such as the Western Ghats, lose 50% of rainwater through evatranspiration. Since land is so expensive, would solar panels covering rivers and lakes save water while producing electricity? Companies could be paid for water saved.

Strong rupee: best time for a holiday abroad.

"Rupee strength is unjustified," wrote Anantha Nageswaran. Why so? Because the rupee is being pushed by foreign investors pouring money into Indian equities and bonds. "Strong capital inflows do not constitute 'sound economic fundamentals'. They are hardly mirrors to fundamentals but they reflect investors' perceptions, and that too of the relative variety. So too the exchange rate. India's economic growth is middling. It is unbalanced. Private capital formation is still missing. Savings rates have not risen. But the trade deficit is rising." Imports increased by 49.1% in dollar terms and 44.7% in rupee terms in April, compared to April last year and, although exports also increased, the trade deficit was 173.5% higher compared to last year. That is because we manufacture very little and the strong currency makes imports cheaper than products produced locally. Our trade deficit has been helped by low oil prices and because other countries, like China, are resisting depreciation of their currencies. On the other hand, Ashwin Ramarathinam thinks that the strength of the rupee is because of the strength of the economy. There is political stability, the current account deficit is low, inflation has fallen and the economy is expected to grow. According to Kunal Bothra, going by past experience, the rupee will appreciate to below 58 to the dollar in the next 12-18 months. One reason for the strong rupee is that interest rate is high relative to inflation. Retail inflation fell to 2.99% in April, well below the RBI target of 4%. However, inflation expectation has risen to 8.8% and the collapse in food prices, consequent to demonetization, will not last, said Pattnaik and Rattanani. Foreign investors are pouring money into Indian bonds because of higher returns and a stronger rupee increases their profits when converted back to their own currencies. While hot money is flowing in, remittances from Indians living abroad has fallen by 8.9% last year, according to the World Bank. But it is not all foreign investors, domestic investors are pushing up stock prices through mutual funds. Despite that foreign investors hold nearly 40% of our stock market. Normally the RBI could lower interest rate to make bonds less attractive to foreign investors and buy dollars from the market, but it is restricted by the huge liquidity unleashed by demonetization and the fear of rising prices once notes come back into circulation. Buying dollars will release even more rupees into circulation, when it is struggling to reduce money supply, and a weaker rupee will make imports more expensive and raise inflation rate. Whatever it pros and cons a strong rupee is definitely good news for those holidaying abroad. Enjoy while it lasts.

If the rules are so complicated how can they be good for business?

The government announced an extremely complicated Goods and Services Tax regime, with four different rates of taxation and the option of taking the tax rate up to 40% by adding extra taxes called cess. India ranks a lowly 172 among 190 countries in the ease of paying taxes, which gives immense powers to tax officials. Why is the government introducing such a complicated system which will increase compliance costs for every business and lead to rise in prices? The government says it will create a common market across India and lead to growth in the economy, but the real reason is that the government wants to squeeze as much tax it can out of citizens. Why the pessimism? Because the government is training 2 million tax officers to keep a check on everyone and has increased their powers to search premises without giving any reason, which will greatly increase their ease of extracting bribes. India already boasts of the highest rate of bribery of public officials in the whole of the Asia Pacific region. We have been lamenting the nexus between politicians and civil servants, known as neta-babu raj, for years, and this is becoming even more oppressive under this government. When you pass a bad law you try to mitigate its adverse effects by strong-arm tactics. So they are warning businesses not to increase prices. Somebody has to pay for the vast numbers of accountants required to file returns every month in every state and if companies cannot pass on their costs they will run into losses and shut down. Job creation is anemic so India cannot afford job losses. Paranoid suspicion of citizens results in inability to carry out legitimate business. The suspicion is so acute that anyone moving any goods even from shop to customer will have to obtain an E-bill, which means that trucks will be held up at borders between states while their E-bills are checked. The long lines of trucks that we see now, because of octroi, will remain and may get worse if computers don't function or there is a power outage. Today perishable goods cannot be transported from an area of excess to where prices are high. For example, while farmers are throwing away tomatoes in Karnataka prices in Delhi are in excess of Rs 25 a kg. Expect farmer suicides to continue, or even increase, after GST. Meanwhile, the CBI claims to have enough evidence of financial crimes against Karti Chidambaram to put him away for a long time. Like many others before him Karti has scarpered to London. How do they get visa so easily, why doesn't the government put out a warning or do they have double passports? We should be told. Mistrust of all citizens and a first class ticket to London for the real burglars. Ain't that great?

Saudis are hoping to trump Iran.

Donald Trump just visited Saudi Arabia where he was given a tremendous welcome and deals worth $350 billion over 10 years, of which $110 billion will be immediate. Relations between Saudi Arabia and the US had fallen to a low level during Obama's term, because of his nuclear deal with Iran during which Obama suppressed investigation into smuggling of vital parts to make nuclear weapons. Iran is most probably continuing with its efforts to create enough enriched uranium to be able to make nuclear weapons at short notice because it is guarding its facilities with S300 surface-to-air missiles, the latest from Russia. There are rumors that Obama threatened to shoot down Israeli planes in 2014 if Israel tried to bomb Iran's nuclear sites. The Obama administration denied the rumors. No wonder, Prime Minister Benjamin Netanyahu hated Obama, a feeling which Obama reciprocated. For the first time, the Obama administration abstained, instead of exercising its veto, during a Security Council vote which declared Israeli settlements as illegal. Sunni Saudi Arabia is trying to acquire nuclear weapons because of its fear and hatred for Shia Iran. There are rumors that the Saudis may already have bought nuclear weapons off the shelf from Pakistan. Israel is already known to possess nuclear weapons which they probably tested with the help of the apartheid regime in South Africa. Iran has been testing ballistic missiles capable of carrying nuclear weapons. If they can develop a warhead to fit their missiles it would be an existential threat to both Saudi Arabia and Israel. It is entirely possible that Israel and Saudis will jointly attack Iranian facilities if they have any reason to fear that Iran is about to make weapons. They will want the US to stay neutral, even if it does not support, such an attack. How important that is can be guessed from the enormous deal the Saudis have signed with Trump. With oil prices down the Saudis are running budget deficits in billions of dollars, so this will strain their finances even further. The world is focused on US tensions with North Korea and Trump's problems with Russia. Markets have largely discounted any prospect of imminent conflict between the US and North Korea, simply because the danger of massive casualties in South Korea. The Middle East is different. It works on hatreds which are thousands of years old. The hatred between Persians and Arabs, between Sunnis and Shias, between Saudi Arabia and Iran over the control of the two holy mosques cannot be understood by outsiders. Add Jewish Israel to the mix and you have the most unstable explosive one can imagine. Perhaps, a strong stance may discourage Iran from proceeding further and prevent a devastating war.

OBOR and terrorists, will be fun to watch.

Last weekend China hosted a meeting of almost 30 world leaders for its One Belt One Road, or OBOR, also known as Belt Road Initiative, in Beijing. Apparently, China wants to fill the gap left by the US under Donald Trump's 'America First' policy to become the sole superpower of the world. The Chinese government insists that this is a purely economic project aimed at improving the global economy, which will help China by helping everybody. India did not attend because the China Pakistan economic corridor passes through Pakistan Occupied Kashmir. although many pundits in India believe that we missed an opportunity to improve our infrastructure. Writing from the US, Seema Sirohi says that Trump's craven submission toXi Jinping is harmful for India and OBOR is a dangerous strategy for backdoor colonialism. Pakistan sees the economic corridor as a game changer which will provide valuable infrastructure, electricity and water, and so will boost its flagging economy. A recent leak in the Dawn newspaper in Pakistan shows the extensive nature of Chinese plans for the economic corridor. The Chinese plan to take over vast tracts of agricultural land for growing fruits and vegetables. There will be economic zones for industry, presumably Chinese. There will be meat, vegetable, and fruit processing plants. They will take over mineral extraction in Balochistan and Khyber Pakhtunkhwa. The Chinese will install CCTV cameras and security along the corridor and a safe city will be created in Peshawar. This means soldiers of the Peoples Liberation Army will be stationed all along the corridor and deep into Pakistani territory, presumably with the freedom to shoot at anyone they suspect as terrorist. Finally, fiber-optic cables will be laid along the corridor to broadcast Chinese programs to Pakistanis. China is to invest $62 billion in the project as a loan, which Pakistan will start to repay in 2020. Apparently, China has been planning this project since the 1950s, wrote Iftikhar Rasheed who was involved in part of the negotiations with China. "Can China afford its Belt and Road," asked Christopher Balding. To pay for it China would have to make its currency, the renminbi, freely tradable but that risks a precipitous fall in its value. International lenders may refuse and borrowing countries need to run a trade surplus with China to repay their loans. Sri Lanka is struggling to repay its loans because of the extortionate rate of interest. India did well to stay away. We need to guard our border and wait for the Chinese to kill a few terrorists and then watch the fun as all the jihadis gang together against the Chinese. Scum vs scum, let them eliminate each other.

Productivity or populism, a difficult choice.

"Economics pundits like me spend a good deal of time worrying about productivity," wrote Prof Noah Smith. That is because productivity has become stagnant, despite the fast changing advances in technology. But, maybe parameters for measuring productivity are incorrect, because sustainability is not being measured. "Suppose you're an entrepreneur who can invest in a gold mine or an online retail business. The gold mine will eventually run out,.... Each may make the same profit in the first five years -- or the gold mine may even make more -- but 50 years down the line, there's a better chance the online retailer will still be generating a profit." Fossil fuels will eventually run out but solar energy will last indefinitely if we develop the technology to store it. Action to control climate change will give returns for a long time to come. This is supported by Rajivlochans who wrote that for India to become wealthy we must think long term. "The process of creating wealth has far more to do with improving productivity and efficiency than merely the building of bridges, roads and airports or even setting up factories worth billions of dollars." To improve productivity we must improve output which needs a highly skilled workforce. "The data shows that any increase in skills, even in agriculture, can lead to a 30% rise in incomes. In the manufacturing sector, the increase in income is of the order of 80-95%." Ownership of property has to be clearly defined so that people can borrow against it and providing information to citizens increases wealth creation. The trouble is that our politicians and civil servants passionately believe in keeping everything secret because that gives them power over citizens. Till today on one knows what went on between Jawaharlal Nehru and Lord Mountbatten in the run up to independence. "White households earn at least five times more than black households," said President Jacob Zuma. "...only 10% of the top 100 companies on the Johannesburg Stock Exchange are owned by black South Africans." This despite strong affirmative action for over 14 years, known as Black Economic Empowerment. Why? "The problem is that production requires not just capital and labour, but also knowhow -- a factor of production ignored by Marx and his acolytes. Knowhow is the capacity to perform tasks. It exists only in brains," wrote Prof Ricardo Hausmann. Unforunately, "Knowhow is transmitted and accumulated slowly..." Politicians are reluctant to undertake economic reforms because they maybe unpalatable to some people, wrote Prof Vivek Dahejia. It is much easier to carry out populist policies as long as the economy is growing. But, populism does not create jobs. It does win elections, though.

Only 18% tax on hats, bird feathers and false beards. Useful.

The Goods and Services council, which means a bunch of politicians, have announced a list of products that citizens use and the rates of taxes that we will have to pay on them. Thirteen products, including human blood and bangles, made of non-precious metals, will not attract any tax. Accident victims wearing iron bangles will be happy. Oral rehydration salts, which contain sodium chloride, and nuclear grade sodium will be taxed at 5%. Instant recovery. Coronary stents, artificial kidneys and broomsticks will also be taxed at 5%. Witches will be happy. Anesthetics and all suture materials, which means all operations, will be taxed at 12%. Steam taxed at 12%. Does that mean every time we have tea we send them a cheque? Glands and other organs for organo-therapeutic (sic) uses at 12%. So, an organ used for transplant will be taxed at 12%. That will be reassuring for the dead donor. Infant use preparations, hats, false beards and bird feathers will be taxed at 18%. Mothers wearing hats and false beards can breathe easy. The rest, including toothpaste, fur and revolvers will be taxed at 28%, with the government adding cess on whatever it feels like. Politicians insist that prices of goods will go down. That remains to be seen. But, apart from food and beverages, we buy goods at long intervals. Refrigerators, cars and false beards are changed after years, and cosmetics may last a few months, but we need to use services frequently, and most of these will be taxed at 18%. Services companies will have to register in every state that they do business in, which means having to file tax returns separately in each state every month. That will need an army of accountants, adding vastly to costs, which they must pass on to customers or go out of business. Even BJP states do not trust the central government. Why? Because politicians need money for handouts they promise before elections. Even smart phones that don't work cost money, as the BJP government in Madhya Pradesh is finding out. Instead of reducing, states are taking on more debt to finance their expenditure. One year back the center increased the share of taxes of the states by 10%, from 32% to 42%, but, cunningly, it increased its tax collection by adding cess on services, which is not shared with states. So, in effect, the share of states went up by only 7.7%. No wonder, there is no trust. The government is angry that China's credit rating was increased, while ours was not. In an interview, Thomas Rookmaaker, Director of Fitch Ratings said that India needs to have a track record of reducing debt. One way to reduce debt is to allow retail inflation to increase, but that will lose elections. Hence this ridiculous list of taxes. Amusing.

Credit rating is actually a rating of trust.

In a big drama the CBI and Income Tax officers raided the homes of former Finance Minister, P Chidambaram, his son Karti and also properties of former Bihar Chief Minister, Lalu Prasad Yadav. Predictably, all of them have condemned the searches as politically motivated and promised to fight the government of Prime Minister, Narendra Modi. Will these moves lead to arrests and lengthy jail terms? No. These are used by all politicians to score points against opponents, using taxpayer money to create sensational stories, following which things will meander through the courts for decades, until everyone loses interest. Ms Jayalalithaa was acquitted of acquiring vast wealth through illegal means and became Chief Minister of Tamil Nadu again. The case took 21 years to reach the Supreme Court, by which time Ms Jayalalithaa had died and her friend VK Sasikala was sent to prison. Lalu Prasad Yadav, convicted of theft and sentenced to 5 years in prison has been out on bail since 2013, living in luxury in Delhi. His campaigning in the assembly elections in Bihar in 2015 won 80 seats for his party, the RJD. The allegations against Karti Chidambaram have been grumbling on for over 2 years with 'poof' of assets in various countries throughout the world, and wills leaving controlling interests in several companies to his daughter. What is the point of the present raids? Are they so stupid that they have stored evidence where they will be so easily available? There have been allegations of illegal land dealings against Robert Vadra, son in law of Ms Sonia Gandhi. A commission was set up to look into the allegations. Why? Are the investigating agencies so incompetent? Indeed, the Supreme Court set up a Special Investigation Team to look into Modi's involvement in the Gujarat riots of 2002, when Modi was the Chief Minister of Gujarat. Milan Vaishnav et al wrote that India's progress is held back because it has very weak institutions. Perhaps, deliberately so, because those in power can game the system to their advantage. Rs 2.6 trillion worth of bank loans could become bad in the next 12-18 months, reports India Ratings. This is in addition to another Rs 7 trillion already stressed. Air India has a debt of Rs 460 billion because politicians use it as their personal carrier. Indians have such a mistrust of the government that they buy gold to hedge any risks to the system, even though it pays no interest and may lose value. Experts are puzzled why credit agencies keep our rating just above junk status when other countries with larger debt have higher status. Just read the papers and connect the dots. Foreigners do.

The quality of food tells the story.

We already know that the richest 1% of Indians hold 58.4% of the total wealth of the nation and the top 57 billionaires have as much wealth as the bottom 70% of the entire population. But, how does it translate to the intake of food, the most basic of human requirement? A survey was conducted comparing the eating habits of different sectors of our society by dividing the population into fractiles and into rural and urban. It showed that the top urban 5% spent Rs 2,859 per month on food, which is 9 times the bottom rural 5% who spent a meager Rs 315.84 per month on food. The top 5% spend only twice as much as the bottom 5% on cereals but the difference jumps when more nutritious items are taken into account. It is not that the rich are eating large amounts, it is just that the poor are eating too little. The lowest 5% spend just Rs 4 on fresh fruits per month, Rs 52 on vegetables, Rs 18 on milk products, Rs 22 on pulses and Rs 14 on meat, fish and eggs. Indeed, they spend Rs 24 on spices per month, possibly to add taste to their low quality food. Rural poverty in India is dire. Over 12,000 farmers committed suicide every year since 2013, leaving their families destitute and helpless. Farmers suffer if crops are destroyed due to poor monsoon or floods, but may be left bankrupt if prices crash due to a bumper harvest, as has happened recently. This is because they increase area under cultivation if prices rise one year, resulting in an excess of the produce the next year, leading to a crash in prices. This is apparently known as the 'cobweb phenomenon'. Farmers in Maharashtra produced 1.171 million tonnes of tur dal, a kind of pulse known as 'pigeon pea' in English, this year, compared to 440,000 tonnes last year. Prices have dropped below what they spent on seeds. Two studies in the US found that the brains of poor children are 6% smaller than their wealthier counterparts, affecting mainly the cortical areas. They naturally do worse in educational achievements and earn much less, which means that poor nutrition in childhood affects a person throughout life. Not much point in legislating Right to Education if their brains cannot cope. Why are farmers allowed to overproduce? Our agricultural scientists should advise farmers how many acres to plant, how to rotate crops and provide them with seeds. Trouble is that farming is dependent on the kindness of the monsoon. About Rs 700 billion was siphoned off from the irrigation budget in Maharashtra. 28% of the cost of building a dam is paid as bribes, said a contractor. It could be done but will take time. Trouble is there are elections to win. 

Hackers must be grateful to the CIA and the NSA.

Last week a malware devised by the National Security Agency was used to block computers all over the world. A tool known as Eternal Blue was developed by US spooks to take advantage of a weakness in Microsoft software. "This attack provides yet another example of why stockpiling of vulnerabilities by governments is such a problem," said Microsoft President, Brad Smith. He compared it to the US losing some of its Tomahawk cruise missiles. Microsoft had released a patch earlier this year to plug the vulnerability in its Windows system but many did not use it. The hackers demanded a ransom of $300 in Bitcoins before they would unblock computers. Some are blaming Microsoft saying that they should create patches even for older operating systems, but that will be expensive. In Andhra, police computers were infected. Fortunately, this virus was only demanding a ransom but the next attack could easily copy all the data from the police. The Aadhaar details of Andhra citizens could be up for sale. Experts say that the hackers are rank amateurs who have made many mistakes. They have only managed to collect $50,000 so far. Some are blaming North Korea for the hack but so far no one is certain.  There is an uproar in the US, alleging Russian interference with the US presidential election by hacking into Democrat Party emails. A Senate committee is investigating the leaks. But, no one is blaming the US for creating the malware and asking it for compensation. Who has the guts to challenge the big bully? In March, WikiLeaks revealed that the CIA was hacking into smart phones and smart TVs all over the world to spy on foreign citizens. Those hacking tools were stolen and could be used by criminals to blackmail people by getting personal information. The CIA made it look as if Russians are behind their hack. Imagine the CIA getting details of what our politicians and civil servants are up to. They might faint. Apparently, ransomware similar to this one can be bought online for as little as 16 pounds, which is about Rs 1,300. With a gadget bought from Amazon for 257 pounds criminals can steal a top of the range Range Rover, costing 105,000 pounds, in 2 minutes. In October, a malware brought down Netflix, Twitter and Spotify by overloading their sites. The hackers used ordinary domestic gadgets, like TVs, refrigerators and even baby monitors to flood the system. Using WiFi to pay digitally on mobile phones can easily be hacked into. No one will update security on household gadgets. Indeed, we do not even know whether such updates are available. Meanwhile, our government is trying to shove digital banking down our throats. How safe is it? Not at all, is the answer. Luckily, we Indians are poor, so have little to lose. 

How can you create 25 million jobs every year?

The IT industry in India is predicted to lose up to 600,000 engineers in the next 3 years. The IT industry employs 10 million people so at 6% this may seem like a small number but for those who will be sacked it will be devastating. They are usually middle managers who will be 40-50 years of age. At this age most will have families with school going children. And, they will find that chances of getting another job is difficult as most will be considered difficult to retrain. The days when companies did back end jobs for foreign companies, derisively called cyber coolies, have gone. With rising salaries in India this work is shifting to other countries, like Philippines. The nature of IT outsourcing has changed from writing software to cloud computing, internet of things and artificial intelligence and robotics. How serious the crisis is can be gauged by the fact that campus recruitment in IITs has dropped from 79% to 66%, which means that 34% of graduates were not offered a job or did not find offers interesting. Not just the IT sector. Job creation is painfully slow in all sectors. The telecom sector is expected to shed 30-40% of jobs in the near future and banking jobs will also see restructuring. According to some surveys India has been losing 550 jobs across both organised and unorganised sectors for the past 4 years. Why is it so difficult? One big reason is that there are too many young people joining the workforce every year and the sheer numbers make it impossible to create enough new jobs. Our education system is inadequate, so that 90% of newly qualified engineers aren't fit to be employed because they lack the requisite skills. Even as millions are unable to find employment millions of job vacancies remain unfilled. But perhaps the biggest hurdle to job creation is the government, which makes it almost impossible to start a new business. According the the World Bank's index on the ease of doing business India ranks 130th out of 190 countries. There are too many rules and too many government departments to bribe before anyone can start anything. "If your innovation in the country depends on government approval or the judicial process, it will not be a case of 'Made in India', but 'Mad in India'," said Rajiv Bajaj, head of Bajaj Auto, which manufactures motorcycles and has been trying to get permission to make quadricycles. Fortunately, we can learn from our politicians. Children of Mr Lalu Prasad Yadav, who is to be tried for a fodder scam, have become rupee billionaires by acquiring expensive land. Daughter has acquired land in Delhi and two sons have a share in a mall in Patna. Mr Lalu said,"I don't want them to die in poverty." A caring father.

If it is computers there will always be doubts.

Ever since the Aam Aadmi Party, or AAP, came second behind the Congress in the assembly elections in Punjab and got no seats in Goa it has been screaming that the Electronic Voting Machines, or EVMs, had been tampered with. After the BJP won a sweeping victory in UP assembly polls, with 312 seats out of a total of 403, the Congress and Ms Mayawati joined AAP in alleging voter fraud by tampering with EVMs. Ms Mayawati's BSP was reduced to 19 from 80 seats in the previous assembly and the Congress dropped to 7 seats from 28. The biggest loser was the Chief Minister Akhilesh Yadav, whose party the SP, dropped from 224 to just 47. EVMs are standalone machines on which the names of candidates, name of the political party represented by the candidate, and the symbol of the party are printed from above downwards. There is a button against each name which is pressed by the voter according to the candidate she prefers. Right at the bottom is the NOTA button, which stands for 'None Of The Above'. These machines are manufactured by two public sector companies and are programmed to stop working if anyone tampers with them. A few days back Saurabh Bharadwaj demonstrated how he had hacked into an EVM, in front of the Delhi assembly. In response, the Election Commission said that this was a lookalike machine and not what they used. Voting machines have created problems in the US as well. In 2000, Al Gore lost the presidential election to George W Bush when his votes were rejected because of, what is known as, 'hanging chads'. In the US voting machines have been shown to be vulnerable to hacking. Given their thirst for research, professors in the US keep on trying to find ways of hacking voting machines all the time, even if threatened with law suits by the companies which manufacture them. To its credit the Election Commission has challenged politicians to try and hack their machines. Machines will be provided to parties for 7-10 days and they have to demonstrate how to hack them in front of experts. It is not whether the EVMs can be hacked. They have to be downloaded on to a computer where the votes will be counted and computers can easily be programmed to divert a certain number of votes to one party. It is astonishing that no one is talking about that. It is not just what is true, it is a question of perception. In the US Donald Trump is assumed to have won the election due to Russian interference. It is a canard floated by Britain's MI6 and grabbed eagerly by Trump's enemies to discredit his victory. No matter what his supporters say the perception is that he has something to hide. The problem is not with EVMs or the Election Commission, the problem is that people do not trust machines. So they will believe machines are deceiving them.

Seems like deja vu all over again.

Chief Economic Adviser, Arvind Subramanian is incensed at rating agencies for not upgrading India's credit rating. "In recent years, rating agencies have maintained India's BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance). At the same time, China's rating has actually been upgraded to AA-, even though its fundamentals have deteriorated," he said. Last month India questioned Moody's methodology when it too refused to upgrade our rating. In response Moody's pointed out that bad loans at banks have not been resolved, at 21% of GDP India's revenues are lower than the median of 27% for Baa- rated countries, debt situation is not as rosy as the government says and debt affordability is low. We have been through this loss of face many times before. In 2013, the Manmohan Singh government begged for a rating upgrade based on efforts to reduce fiscal deficit and trying to increase investment, completely forgetting that the mess was of the government's own making. This government is at the same stage as the Congress government was in 2007 when the economy was growing at over 9%, average retail inflation was at around 6% and the rupee was very strong, peaking at 39.26 to the dollar in January 2008. The Bombay Stock Exchange index reached a record 20,000. The Reserve Bank bought $78 billion to try and stop the rupee from becoming stronger and then had to issue Rs 2 trillion worth of Market Stabilization Bonds to mop up the excess liquidity. Now, as then, there is enormous liquidity in the market, mainly due to demonetization of high denomination notes on 8 November. The Sensex is at record territory. The real effective exchange rate of the rupee is 7% overvalued, hurting exports. Foreign investors poured $3.5 billion into government debt in April. Just this year a total of $14 billion have come into equity and debt. The government has changed the base year for calculating economic parameters to 2011-2012 from the previous base year of 2004-2005, which saw a jump in the growth rate of the GDP. Yesterday figures for inflation and industrial growth were released, based on the new base year. This shows that retail inflation has fallen to a record low of 2.99% in April, wholesale price index fell to 3.89% and industrial production rose by a whopping 5% in the financial year. Food has a large weight in retail inflation. Vegetable prices have jumped recently with tomato at Rs 24 a kg, bananas at Rs 50, onions at Rs 22, karela at Rs 54 and potatoes at Rs 19 a kg. So the new figures probably do not show the full picture. The Congress won the general elections in 2009 with an increased majority and then things fell apart. As Yogi Berra said,"It's deja vu all over again."

One belt, one noose.

A long term bear on China, Anantha Nageswaran wrote,"China is not collapsing." The economic picture is not good with "stocks in decline, bond yields rising, defaults picking up and overnight interest rates up". To stop rampant outflows of capital China has instituted draconian capital controls. Axiom Capital estimates that its foreign currency reserves are, not $3 trillion, but only $1.7 trillion, well below the estimated safety threshold of $2.6 trillion. Donald Trump came to office promising 45% tax on Chinese imports, but has chickened out, and speculators are afraid to test the renminbi in a concerted attack, because,"If China went under so would many of them." Indeed, the renminbi was admitted to the basket of currencies which make up the Special Drawing Rights of the International Monetary Fund just last year, which means that it should be freely tradable. "China bears will have to wait for hubris-driven political and power over-reach, resulting in disastrous decisions that topple the applecart." So what is China doing to stop the rot? It is to host a meeting of 30 world leaders this Sunday to unveil its One Belt, One Road, or OBOR, plan, wherein it will invest up to $500 billion in building infrastructure connecting China to some 62 countries. China is selling OBOR as a win-win for all participants but many people are suspicious. The plan is deadly for India because China is our avowed enemy and seeks to encircle India and eventually occupy large tracts of land. The $50 billion dollar China Pakistan Economic Corridor, or CPEC, is a part of the OBOR project and passes through Pakistan Occupied Kashmir, which India claims as its own territory. The generals who control Pakistan must be thinking that once the corridor is built India will never dare to attack because India does not have the courage or the capability to take on China. Fortunately for India there are many in Pakistan who see this as a Chinese land grab and an attempt to control Pakistan by making it indebted to China. China is not gifting all this money. It will be given as debt which make the countries subservient to Chinese interests. Sri Lanka is running up huge losses because of the high interest charged on building a deep water port at Hambantota, an airport and Colombo Port City Project. Several European MPs have expressed alarm over the project. Africa has already suffered from Chinese 'investments' in the past and so should be wary. What is China's gain? China has destroyed steel industry in many countries by dumping it below cost price. It is also accused of dumping aluminium. It plans to use all its excess products in building the promised infrastructure with its own workers and make recipient countries pay for it. Ingenious. On the one hand China is controlling foreign currency outflow, so that it has stopped businesses from overseas acquisitions and on the other it wants to loan vast sums of money to other countries. Maybe, this will be straw that breaks its economy. The Belt may yet turn out to be a noose for China. 

How can same policies have different outcomes?

Some Indian companies are "tigers abroad, lambs at home", wrote Sundeep Khanna. Tata Motors is very successful with its Jaguar Land Rover business and is the fifth-largest truck and fourth largest bus manufacturer in the world but its car business in India is failing. "There are companies in sectors like pharmaceuticals, auto components and textiles that have succeeded in finding scale and margins abroad but not made much of a dent within the country." "The IT services industry is a perfect example." While they service global customers, large outsourcing contracts in India are being taken by foreign multinationals. "Last year, for instance, Ericsson snagged a $500 million pan-India managed services deal from Bharti Airtel." Why? Because of stifling regulations, enormous difficulty in starting a new business and a fragmented market. Then there are wage pressures. As opposed to other countries government employees in India get much higher salaries than in the private sector. An average employee of a public sector bank was paid 27% more than in the private sector, wrote Huzaifa Husain. The cost of a railway employee has risen 11% from 2010-16 and that of State Transport Undertakings has risen by 12% from 2010-15. There is no data of housing stock, sales or holdings. India used to be a leader in population surveys and data collection, wrote Prof Abhijit Banerjee et al, but now data is confusing and contradictory. Accurate data could be inconvenient. India has been vocal in its opposition to protectionism in developed countries. "India must oppose surging protectionism," wrote an editorial in the Mint. It quotes Adam Smith,"Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss." Preaching to other governments is easy but the Indian political class "still harbours unreconstructed predilections towards statism and government command and control", wrote Prof Vivek Dahejia. Speaking at leading universities in India he found "how fundamentally anti-free market the prevailing intellectual currents run and how strong remains the faith that the government knows best". And "professors are often worse". Politicians have no incentive to change previous policies, which they see as vote winners. The Prime Minister promised a Congress-mukt Bharat, meaning India free of the Congress, but he is following the same policies. "In a sense, the Congress party has succeeded more than it thinks. It has succeeded in making the Bharatiya Janata Party (BJP) a mirror image of itself," wrote Anantha Nageswaran. A nation does not become rich by wishing. Needs guts.

Should people get used to low wages?

Unemployment has fallen substantially in the US. "Employers added 211,000 jobs last month, reducing unemployment rate to 4.4 percent, a level last reached 10 years ago," wrote Danny Vinik. But there is a problem. "Since 2010, nominal wages have grown about 2.5 percent each year, while inflation has averaged 2 percent. Perhaps, most concerning, as the labor market has tightened, wage growth hasn't accelerated." Why? It maybe because a large number of people have dropped out of the labor market and are not counted in unemployment figures. A broader index called U-6 is at 8.6%, lower than 9.4% in January, but still higher than 7.9% pre-crisis level. Many believe that wages are not increasing because productivity is low while others say that it could be because some companies have grown so big that they are operating as monopolies which gives them enormous bargaining power. The main reason for the soaring salaries of CEOs, while wages of workers are forced down, is because of the principle of 'maximizing shareholder value', wrote Joe Nocera. "It has widened income inequality. It has rewarded short-term 'make the quarter' thinking over long-term value creation." "It is why drug prices have risen so obscenely, why airlines have made flying such a miserable experience and why wages have remained stagnant even as profits have soared." Airlines get away with bad service because they are relative monopolies and because terrible service forces passengers to upgrade, giving them more money. Many young people have given up on formal jobs and are earning a living from the 'gig economy', wrote Nathan Heller. Some are earning decent amounts of money by renting out spare rooms on Airbnb. But only those who live in nice apartments can attract tenants and by taking away guests from hotels they put millions of service jobs in jeopardy. Because these people are outside the formal sector they have no protection. In India, drivers working for Uber and Ola have no trade union to bargain for their rights, no provident fund and no pension arrangement, wrote Anil Padmanabhan. While wages of workers are stagnant large firms are holding more than $2.6 trillion in offshore accounts so as to avoid paying taxes in the US. Less tax means more profits and more bonuses for the executives. Zombie companies are drawing away finance which should be utilised to improve productivity by using technology, wrote Mann and Andrews. Perhaps, increasing productivity without increasing demand is fruitless. The wealthy live in a world in which beaches are covered with carpets, so that shoes do not get dirty, and where pyramids are sealed off from the public so that a man could propose to his girlfriend, at a cost of $40 million. That is why people are angry and Tomi Lahren will not shut up. The world is changing, the weak are being left out.

After the party the real work begins.

Emmanuel Macron has won the election to be president of France, at 39 years of age the youngest in French history. Both his parents are doctors and he studied at elite institutions. His rise has been meteoric. He graduated in 2004, worked as an investment banker, joined the government of Francois Hollande, the current president, in 2012, and became Minister of Economy, Industry and Digital Affairs in 2014. Part of his fame is because he married a grandmother, 24 years older than him. Apparently, she started her affair with him when he was only 15 years of age and she was his teacher and a mother of three. They married in 2007. He never had any other girlfriend. How weird. The economy is growing slowly, government debt is high and unemployment is in excess of 10%, it is over 20% among those under 25 years of age. Macron is pro-European Union, does not intend to restrict immigration, plans to reduce unemployment to 7% by spending 50 billion euros on job training, infrastructure and healthcare, and plans to save 60 billion Euros in public spending. Already unions are calling for protests against his proposals for the economy. Macron got over 20 million votes, Marine Le Pen got over 10 million, twice as many as her father did in 2002, and 12 million, or 25.38%, people did not vote. Parliamentary elections are to be held next month. Seems that Macron's party, La Republique En Marche, although new, is ahead in the opinion polls. After his victory Macron talked of uniting the country. How? Immigration will continue and Le Pen is going nowhere. To increase employment he will have to convince the unions who fiercely resist an change. Europe's economy grew by over 2% in the first quarter of this year, wrote Ruchir Sharma. Several countries have pruned their welfare payments while Germany undertook labor reforms in 2003 under the then Chancellor, Gerhard Schroder. France still has high state spending and high government debt. "As protectionism and insularity make inroads into numerous countries, France chose openness to the world and innovation," wrote Alexandre Ziegler and Martin Ney, Ambassadors of France and Germany respectively. It is good for India, they say. "It (Europe) is India's topmost trade partner and one of the leading investors in the country. With a single market of 500 million persons, it offers Indian companies unparalleled economic opportunities." Globalization has hurt the poor and enriched the wealthy, which is why Donald Trump was elected. If the old policies created such disparity how will more-of-the-same improve matters? The old world order is dying and no one is sure what will take its place, wrote Manas Chakravarty. We wish him well, but Macron may soon realise that winning an election is probably the easy part.