A foundation built on quick sand.

A few days back the Supreme Court gave its verdict on Aadhaar, which is a twelve digit number unique to every citizen, based on biometric details, such as photographs, prints of all 10 fingers and iris scans of individuals. In a majority judgement, the Supreme Court said that Aadhaar is legal, that it was fine to sneak it into law through a money bill, which does not need assent of the upper house the Rajya Sabha, and it is not an invasion of privacy. The court said that the information cannot be shared with security agencies, private companies, such as banks and telephone companies, cannot ask for Aadhaar and it cannot be made mandatory for school admissions. The problem with the judgement is that the court did not ask why it is mandatory for those of us who pay taxes but get nothing from the government, no pension or healthcare, and why sneak it through the money bill when it has nothing to do with the budget. By accepting it as legal the court has allowed the government to pass amendments to override the courts objections. Only Justice Chandrachud had the moral courage to call it totally unconstitutional. "The entire Aadhaar programme, since 2009, suffers from constitutional infirmities and violations of fundamental rights," he wrote. "The passing Aadhaar Act as money bill is a fraud on the constitution." According to legal experts the judgement opens the door to many legal challenges and, since it takes years , and often decades for a case to be resolved we can expect the fun to go on for our lifetimes. The Supreme Court took no notice of the fact that from the beginning the whole Aadhaar project was built on mendacity, on the use of force and on trying to convince the Supreme Court that Indians do not have a right to privacy, which took a 9-bench court to strike down. Animals do not have a concept of privacy, living in the open and conducting their bodily functions in accordance with the laws of nature. Arguing that Indians have no right to privacy means that, according to this government, we are all animals. Biologically we are, but the problem is that human beings have a right to kill animals. We kill fish, chicken, goats and any animal we think of as food. Naturally, the government then argued that Indians do not have a right to their own bodies, to which the judges did not express any outrage. The whole argument has been about the rights of the poor but surely even a destitute person has a right to be respected and the right to refuse to be prostituted for survival. This is what activists N Dey and A Roy argue. "We have a court which is innocent of ground realities, and has ruled based on figures that are nothing less than a flight of fancy." Aadhaar means foundation. Sadly the foundation of Aadhaar is pure lies. Which the Court meekly accepted.

Why are we importing beads?

A few days back the Indian government increased customs duty on 19 imported goods. However, these will not make much difference in our import bill nor will they help to stop the rupee from falling against the dollar, wrote H Jethmalani and P Pengonda. Higher tariffs will reduce import by only $500 million which is 0.1% of our total imports and a "2-10% increase in tariffs on $10-15 billion of imports" will not support the Indian currency. Sadly, we, the citizens of India are used to very high taxes which keep changing at the whim of whichever political party is in power. What is really shocking is to see what we are importing. We are importing common items made of plastic, like boxes, bottles, household items of plastic, travel bags, beads and bangles. Why, when we have the largest oil refinery in the world at Jamnagar which exports to Western countries and produces "polypropylene, which is used to create such products as fibers, films and household plastic goods? And, if we are exporting refined gasoline to the US why are we importing Aviation Turbine Fuel? "Brokerage firm CLSA India has said that Voltas Ltd's joint venture with Turkey-based Arcelik AS would be hurt as the appliances are 100% imported and their domestic factory will likely take a year to start." Voltas is part of the Tata group, was set up in 1954 and has been selling air conditioners since then. So when we think we are buying Indian we are actually buying products made in Turkey. "Another casualty could be Havells India Ltd since it currently imports 70% of its subsidiary Lloyds' requirement, although the company has the option to shift to domestic manufacturing, said CLSA India." Havells electrical products are in extensive domestic use. Its electric wires, switches, circuit breakers, ceiling fans and water heaters are used by millions. Producing in India where labor costs should be a fraction of those in Europe, and lesser transport costs, should make it much more lucrative to produce in India. India has many companies that make tyres for trucks, cars and two-wheelers. Cultivation of rubber trees is concentrated in South India which produce around 700,000 tons of rubber annually. The industry earns around Rs 500 billion from exports and yet we are importing tyres. Mystery. The rupee has slipped because it was overvalued and the reason for that is that our retail inflation is always higher than that of Western countries, especially the US. Even now it maybe overvalued, according to some. If we have to import the commonest goods from abroad it is no wonder that the rupee is losing value. Good to know that we are also importing beads which were used for trade hundreds of years ago. That is real progress.  

Not aspiring to be in the top 1%.

According to Goalkeepers Global Youth Outlook Poll 44% of Indians are worried about jobs, the highest in the world. 33% are worried about education but 86% are optimistic about the future. A report from the Azim Premji University said the 92% of women and 82% of men earn less than Rs 10,000, which is $139 per month or $1669 per annum. "If you earn more than Rs 50,000 a month, you are in the top 1% of the [national] work force [by earnings]," said Amit Basole, the lead author of the report. Rs 50,000 is just $694, which means $8333 per annum. Thus the top 1% in India earn the same amount as the bottom 20% in the US. Unemployment has reached 16% among educated youth. "Currently, a 10% increase in GDP results in less than 1% increase in employment." According to Okun's law a 2% increase in GDP increases the rate of employment by 1%. GDP of India grew by 8.2% in the April-June quarter this year, compared to 5.6% in the same quarter last year, which is a jump of 2.6%. Seems that job creation has not kept pace with growth in GDP. "The report uses data from Annual Survey of Industry (ASI) statistics (organised manufacturing) to show that while wages for production workers have been almost stagnant, managers' compensation started rising at a faster rate since 2000 onwards." This is without counting other compensation, such as stock options etc. "The report argues that increasing proportion of contract workers, who are paid a fraction of permanent worker wages, often for similar work, might have been a major contributor in this sector." The report classified regular employment as: "formal 1 (simple regular work), formal 2 (regular work with provident fund or pension, gratuity, healthcare/maternity benefits, or paid leave) and formal 3 (formal two with a written contract). 60% of non-agricultural jobs fell in the formal 1 category, with 30% in formal 2 and only 17% in formal 3. No wonder over 93,000 people applied for jobs as peons for the UP government, which demanded education up to Class V and ability to ride a bicycle. Of these, 3,700 had PhD degrees, 28,000 had post-graduate degrees and 50,000 were graduates. This reflects the top two worries for young people in India, jobs and education. Young people desire a salary of at least Rs 30,000 per month which probably makes them even more pessimistic about job prospects, wrote N Kwatra. The quality of jobs available does not match aspirations of young people, wrote R Kishore. Lack of opportunity as measured by Intergenerational Mobility is very low for disadvantaged social groups in India, the lowest being for Muslims. Muslims also have the highest fertility rate. Young people in India aspire for only Rs 30,000 per month, which is not in the top 1%, but they are likely to get less than Rs 10,000. Not much hope.

Shareholders are few, depositors are many.

"Imagine this: your bank makes lousy loans, runs a very unprofitable business, and even under-reports some of its losses to the regulators. And one fine morning you wake up to bag a hefty sum of Rs 576 crore (Rs 5.76 billion) for being the owner of this bank," wrote Prof A Purnanandam. "No this is not a fantasy. You are the shareholders of Dena Bank." "At the very core of this deal, the moral hazard problem is the biggest concern. In any prudent corporate restructuring deal, the reckless bank's shareholders and managers must pay for their bad decisions." How is this happening? Dena Bank, 80.74% of whose shares are owned by the government, is being merged with Vijaya Bank, 68.77% of shares owned by the government and Bank of Baroda (BOB), 63.71% of shares owned by the government. Of the 19.26% of shares of Dena Bank not held directly by the central government, 6.87% are held by the Life Insurance Corporation of India and 1.26% by the General Insurance Corporation of India (total 8.43%), both of which are also owned by the central government. So, the government is buying its own bad shares with money from its other businesses. The real losers are mutual funds and foreign investors in both Vijaya Bank and Bank of Baroda. There is no synergy in this deal, wrote MS Sriram. "Vijaya Bank has 52% of its branches in the southern region", while the BOB is strong in Gujarat and Maharashtra so these two banks complement each other. Dena Bank's footprint coincides with those of the BOB so it is only going to saddle the other two banks with bad loans. Banks in India accumulated bad loans during the growth years of 2002-2009 because of increased lending to infrastructure projects which ran into trouble because of delays in getting permission and problems in acquiring land. Central government ministers forced banks to distribute loans without due diligence, claimed Prime Minister Modi. "Much before Internet Banking, Congress Party invented phone banking and this caused the NPA mess. A phone call would get loans for their cronies and the nation suffered," Modi said. The present government has distributed Rs 6 trillion in unsecured loans, called Mudra loans, to encourage small businesses. In 2004, the then government forced the Oriental Bank of Commerce, a public sector bank to take over a failing private bank, called Global Trust Bank. Indians have little trust in politicians. The government was forced to withdraw its Financial Resolution and Deposit Insurance Bill because of a run on banks in Andhra Pradesh and Telangana. Only about 5% of people invest in shares and they are probably seen as the elite. In 2014, the government forced the takeover of National Spot Exchange Limited, 54% of which was owned by public shareholders. For politicians it makes sense to comfort millions of depositors in banks at the expense of thousands of investors in shares. That is why there was no interest in Air India when the government decided to retain 24% of shares. Hence the bank merger.

They were saved once, so they are at it again.

"In less than two years, my administration has accomplished more than almost any administration in the history of our country," said US President Donald Trump in front of the UN General Assembly yesterday. "America's economy is booming like never before. Since my election, we've added $10 trillion in wealth. The stock market is at an all-time high in history, and jobless claims are at a 50-year low. African American, Hispanic American, and Asian American unemployment have all achieved their lowest level ever recorded. We've added more than 4 million new jobs, including half a million manufacturing jobs." True, but some so-called experts are predicting a recession in two years which will be worse than the Great Depression of 1929 because of a global debt of $247 trillion. The US could be in a dire situation with national debt of $21 trillion just as Trump ends his first term. According to a study "many Americans are still piling up debt faster than savings" and "average personal debt climbed higher than $38,000". "While 20 percent of people allocate half of their income toward debt repayment, one in ten Americans surveyed said they expected to be in debt for the rest of their lives." "The main sources of debt were credit cards and mortgages, which each made up an average of 25 percent of an individual's debt." In Britain, "A subprime mortgage lender set up by former Northern Rock directors is to sell 500 million pounds of controversial mortgage backed securities..." "It says it allows up to three country court judgments and two missed mortgage payments for residential mortgages." In short, to people who have already defaulted. They clearly intend to charge exorbitant interest like the payday loan firm Wonga which charged interest at 4,000%. The US will go into a recession as the economy overheats, the Federal Reserve tightens its Funds Rate and growth in the global economy slows down, wrote Prof N Roubini and B Rosa. Stock markets are at very high levels and due for a correction. "As growth stumbles, Beijing is falling back on a tried and trusted solution: using large, government-backed companies to spur activities," wrote A Trivedi. Starving the private sector of investment did not work during imperial times and is unlikely to work now. A decade of record low interest rates has increased debt as the rich have accumulated assets through leverage financing, wrote VA Nageswaran. "As existing assets change hands, their values are bid up to unjustified levels, resulting in concentration of wealth. "Simply, risk has migrated from home mortgages to other areas that we will know about when the next crisis arrives." Things maybe going well for Trump but it is more important to finish well. He should ask "my friend PM Modi". 

Good luck at the wrong time, that's really bad luck.

"Two out of three governments get thrown out in India," wrote R Sharma. "In America, the number is just the opposite, two out of the three get elected." He is talking about state and central governments combined. "The moment they are in office you can see the arrogance building, they are surrounded by 100 sycophants around them, everyone is praising them....they live in a bubble that people are following them." "Those states where the growth rate was more than 8 percent for the five year period -- which is very high growth rate -- do these governments get re-elected? There are 30 such cases in India only where you had growth rate over 8 percent over the five-year time and the answer was 50:50." Depends on luck and reasons for growth in GDP. Initially there was good luck for Prime Minister Modi. The price of crude oil dropped from over $100 per barrel in May 2014, when he was elected, to around $30 a barrel in February 2016 which reduced current account deficit and allowed the government to collect an extra Rs 10 trillion by raising excise duty on petrol and diesel at least 11 times in 3 years. This extra money was extremely useful to cover bad luck as India suffered severe back to back droughts in 2014 and 15. "International food prices decreased by 14% between August 2014 and My 2015, dropping to a five-year low, according to the latest edition of Food Price Watch," wrote group from the World Bank. Wheat plunged by 18%, rice by 14% and maize by 6%. Agricultural exports from India declined to $33.87 billion in 2016-17 from $43.23 billion in 2013-14. Farmers faced severe distress as food prices declined and their earnings fell below costs. The government resorted to waiver of loans to placate farmers but Prof Himanshu wrote that this is not enough. Financial support of farmers is necessary but long term solutions include building infrastructure for the changing nature of crops as farmers switch from grains to horticulture. Increased tax collection and lower inflation encouraged Modi to administer a sudden shock to the nation by withdrawing all high denomination notes. The agricultural and informal sectors suffered the most as they deal almost exclusively in cash. The government was able to stimulate growth to 8.2% in the quarter ending 30 June by increasing spending. Most of the growth was due to a jump in private consumption which increased imports and the current account deficit, wrote M Chakravarty. This is when bad luck in the form of rising oil prices has complicated matters. A jump in trade deficit has resulted in a fall in the value of the rupee. A weaker rupee makes oil even more expensive for citizens. But the government cannot cut taxes on fuel without losing control of budget deficit. The only solution to the problems is to reduce growth rate, wrote J Aziz. The actual problem is that good luck came before bad. If only it had been the other way round.

It is not their fault that the police are despised in India.

"Police reforms are necessary to change it from a colonial to a people-friendly force," wrote P Singh, a former Director General of Police. "The Supreme Court gave a landmark judgement on police reforms on September 22, 2006, giving seven comprehensive directions out of which six were for state governments and one for the central government." Today, after 12 years, "Seventeen states have passed Acts purportedly in compliance of the court's directions but essentially to circumvent them. The remaining states have passed executive orders which are in violation of judicial directions." The Justice Thomas Committee expressed "dismay over the total indifference to the issue of reforms in the functioning of the police being exhibited by the states", in its report in 2010. But, "The states remain adamant. The colonial structure suits the political class because it enables them to use, misuse and abuse the police in a partisan manner." "Contrary to Abraham Lincoln's famous definition of democracy, India has a government of VIPs, by VIPs and for VIPs. They do what they can, the people must suffer what they must," wrote Prof R Thakur. The Congress is especially responsible as the party in power all over India after independence. Prime Minister Modi promised good governance to win election in 2014 but, "T'was not to be. In this as in most other respects, the gap between boastful rhetoric and actual practice remains distressingly wide: the 56-inch chest has been overshadowed by a 96-inch tongue." 36% of all members of parliament and state assemblies have serious criminal charges against them. The BJP, the party of the Prime Minister, has the highest number of members with charges of crimes against women. It is very comforting for these criminals to be protected by the police, with every VIP, which stands for 'very important person', being protected by an average of 3 policemen while there is one policeman for 663 people. Not only does it protect them from being arrested and prosecuted but it also protects them from retaliation by victims of their crimes. This government "vehemently rejected a suggestion by the Supreme Court to link political parties' recognition to not fielding candidates tainted by criminal records in elections", because criminals have the money and goons to win elections. Politicians protect criminals. Thousands of Sikhs were slaughtered after the shooting of Indira Gandhi in 1984 not a single politician has been convicted despite several commissions naming several individuals. In Thoothukudi police have been breaking into houses at night and arresting people after shooting 13 protesters to death on orders of politicians. People seek the help of known criminals for protection against the state. Our soldiers risk their lives to protect people while the police act as agents for criminals. Both are in uniform, one respected the other a disgrace. No fault of theirs.

We should be ready to buy when markets crash.

In 2008, after the fall of Lehman Brothers there was "a heated debate about how the leading American banks had grown 'too big to fail'. But it overlooked the larger story, about how global markets had grown too big to fail," wrote R Sharma. In 2008, "the markets for stocks, bonds and other financial assets had tripled over the previous three decades to 347% of the world economic output". "Today the markets are even larger, 360% of global GDP, a record high." Why? Because, "Over the past decade, the world's central banks  -- in the United States, Europe, China and Japan -- have expanded their balance sheets from less than $5 trillion to more than $17 trillion..." Financial authorities are "trained to focus more on how markets respond to economic risk than on the risks markets pose to the economy" so they seem to be oblivious of "the $290 trillion now sloshing around global markets". Markets in India also reached record highs last month and continued to climb, claiming a new record almost everyday. This despite a fall in the value of the rupee which is making imports more expensive and adding to the rising price of oil, which has risen from around $30 per barrel in 2016 to $73 per barrel today. Experts expect the rupee to remain volatile under pressure, with Indians scared to predict how low it will fall, but one foreigner said that fair value is around 73 to the dollar while another predicted that the rupee could fall to 80 if it breaches 72 to the dollar. The stock market fell by over 1100 points a couple of days back but clawed back over 900 points in the afternoon to close only 280 points down. "American companies will dole out nearly $1 trillion in cash to buy back their shares in 2018, the highest ever. It is suspected that the share buyback is part of the reason for the buoyancy of the share market," wrote A Ranade. What is the problem with that? It accentuates inequality. "In the US, more than 80% of shares are owned by 10% of the population. In India, this ratio is much more skewed." It rewards shareholders but not employees because companies have less cash in hand and it shows that the emphasis is on short term profits, rather than spending on long term growth. The Federal Reserve's stress test for the largest bank is "comically absurd" said former Treasury Secretary Lawrence Summers. "The nation's largest bank holding companies are strongly capitalized and would be able to lend to households and businesses during a severe global recession," The Fed said in June. "That, I would suggest, is a comically absurd conclusion that is belied by the most elementary analysis of the beta of those major financial institutions," said Summers. Economics is based on studying events after they happen and building models so economists do not make money from markets because they do not really understand them, wrote V Praveen. If markets crash it will be the best time to buy stocks. But, only the rich will be able to afford it.

Nostalgia for the empire, perhaps.

Two days back British Prime Minister Theresa May was in Salzburg to persuade leaders of the other 27 nations that make up the European Union that her Chequers plan was the best way for Britain to leave the EU. The British contingent had hoped for a courteous reception of the plan, and were infuriated when the other leaders, led by Chancellor Angela Merkel of Germany and President Emanuel Macron of France, rejected the plan outright. "Mr Macron made it clear he wanted to punish Britain to dissuade other member states from heading for the EU's exit door. The French President branded pro-Brexit politicians as 'liars' adding: 'Brexit shows that it is not easy to leave the EU. It is not without costs. It is not without consequences." The genesis of the problem came last year when May called an early general election, hoping to increase her majority in the House of Commons which would have given her absolute authority to negotiate a Brexit agreement, but ended up losing her majority and having to hang on to power with the support of the Democratic Unionist Party, DUP, of Northern Ireland. The DUP is against a hard border between Northern Ireland, which is a part of the United Kingdom, and the Republic of Ireland which is not only a member of the EU but also of the Eurozone. A suggestion that there should be a border in the sea between Northern Ireland and the rest of Britain has been rejected outright by the DUP and the British government, because it would seem like a division of Britain. Hence the Chequers Plan, which suggests that the UK would collect taxes for the EU far from the border so that there is no customs check at the land border to allow free movement of goods. However, the UK wants to stop free movement of people to reduce immigration so there will have to be immigration checks at the land border. The reason why the EU is taking a tough line against Britain is to scare the anti-EU government in Italy which wants to stop taking immigrants from Africa and wants other countries, like France, to take more of them, precipitating a very unpleasant war of words between the two governments. May has ruled out a second referendum on Brexit. Why? Before the referendum May was against a Brexit but is now adamant the Britain must get out of the EU saying that "a no deal for Britain is better than a bad deal for Britain". Which makes her a hypocrite. Brexiteers, led by Boris Johnson, claimed that Britain would save 350 million pounds by leaving the EU. Now that the real costs are becoming clear surely people should be given a second vote to decide it they want to undergo such hardship. Claiming one referendum is democracy but a second one is not is specious. May said angrily that the EU must make concessions. She must remember that Britain is no longer a superpower with an empire. Just a little island in the North Sea.

The more you look the more you discover.

"The past two years or so have seen rapidly increasing stress in the Indian banking sector, with non-performing assets (NPAs) steadily climbing from under 3% to over 13% of total assets," wrote P Sen. The problem rose mainly after 2002. "Prior to that, Indian banks mainly had two types of loans; (a) working capital loans to production entities, firms, and farmers (76% of banking portfolio); and (b) retail term loans to households for housing, and durable goods (less than 24%). Since then, banks have been aggressively making term loans to companies for fixed capital investments, like land, building, and machinery. This now accounts for 38% of the portfolio, with working capital at 42% and retail at 20%. The bulk of NPAs by value are long-term loans to corporates." The trouble was that banks did not have the knowledge to assess risks of projects, companies diverted funds to other projects and obstructed every attempt at loan recovery. The problem was exacerbated by the government which stopped tax-free bonds, to fund infrastructure projects, in 1997 and forced public sector banks to extend loans for infrastructure from 2002-2009. Total NPAs in the Indian banking sector stood at Rs 10.17 trillion at the end of March 2018. To add to that, undeclared NPAs could add another Rs 3 trillion to the total. This is apparently because a borrower may have defaulted to one lender but other lenders were still unaware of the default. "We are in a position to come up with this information as we have the data which enables us to provide a 'one bank' view," said S Pillai. Another Rs 1.74 trillion may need to be added to the rising pile of NPAs due to "34 thermal power projects, representing 40 GW of capacity, going sour, jeopardising Rs 1.74 lakh crore in bank loans, becoming the principal line item in India's terrifying bad loans problem." Rs 6.37 trillion have been lent as part of the Prime Minister's MUDRA loans to encourage startups by young aspiring entrepreneurs. "Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk," wrote former Governor of the Reserve Bank Raghuram Rajan. Unsecured personal loans have climbed from a total of Rs 5.89 trillion in 2010 to Rs 19.33 trillion in 2018. Infrastructure Leasing and Financial Services Ltd has a debt of $12.5 billion of which $500 million will be coming up for repayment by March of next year. It has only $27 million available, wrote A Mukherjee. The NPA problem was born since the year 2000 when capital flows started to increase. "From $17.3 billion in 2003-04 , net capital flows jumped over six times to $107.9 billion in 2007-08," wrote PV Iyer. This created massive liquidity in banks which increased lending without diligent checks of credit worthiness of borrowers. This means bad loans could amount to three-quarters of our $2.5 trillion GDP. Scary.

Politics and economics have different priorities.

Politicians cannot resist the charm of controlling prices, wrote A Ranade. "Farmers have been assured a higher minimum support price (MSP) for 23 crops, no matter how low the market price may drop." To protect farmers against low prices and encourage cultivation, the government has a list of crops that it buys at higher than market price at the Minimum Support Price. This year the government has promised to buy 23 crops at a rate 50% higher than the cost of production. But this is a sham, wrote Prof Himanshu, because the government buys only wheat and paddy and its system of calculating costs is lower because it does not take into account the family labor costs of farmers. "The state of Maharashtra toyed with an innovative trick. The state government said that any trader found to be paying less than MSP to a farmer would be sent to jail for a year. This is innovative because it passed the monetary burden of MSP from state exchequer to the wholesale or retail buyers." This was never going to work, wrote Prof A Gulati and S Saini. If traders are to buy at MSP rates and prices fall due to excess production who will they sell to? They will suffer heavy losses. What is to stop them from buying in neighboring states at cheaper prices and selling in Maharashtra? Or they can just shut shop."If they purchase zero quantity, then they pay zero price, whatever the diktat." The government is to impose an import substitution policy to reduce imports of inessential goods and support domestic industry. Customs duty on over 400 items has been increased. How will the nation benefit when other countries impose duties on our exports is retaliation? Mobile phones are a must have these days, especially for the poor, so why is it inessential? The government is investigating deep discounts offered by e-commerce companies to see if this is a case of 'predatory pricing'. On the other hand, when a new telecom company offered its services at near zero rates "The order of the Telecom Regulatory Authority clearly said that entrants cannot be guilty of predatory pricing." While the government wants to increase prices of goods and services that we buy it is offering ridiculous rates to hospitals for its health scheme Ayushman Bharat. Airlines industry is looking at losses of between $1.65 and $1.90 this year because fuel prices in India are the highest they have ever been. "Price controls have an irresistible charm for policymakers. Even after learning the hard way that they don't work (ask Richard Nixon about his wage and price controls), they are always in fashion." They may not work economically, as long as they get votes. Different priorities.

Some of the tariffs will be canceled out by a strong dollar.

The US announced a 10% tariff on a further $200 billion worth of Chinese imports into the US. In retaliation China announced tariffs on $60 billion worth of US products which means that China has now increased tariffs on almost all goods imported from the US. US President Donald Trump accused China of trying to influence US midterm elections in November by targeting his supporters. "China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me," he wrote. "There will be great and fast retaliation against China if our farmers, ranchers and/or industrial workers are targeted." Opponents of Trump claim that tariffs will result in a rise in prices which will hit ordinary people. "At a time where wage growth has been pretty limited, every dollar counts and price inflation means fewer dollars consumers have left to spend somewhere else," said G McBride. But a 10% tariff will not translate to a 10% rise in prices because the Chinese currency the renminbi has fallen over 5% in value since April. The renminbi strengthened to 6.491 to the dollar earlier this year but is trading at 6.85 today. The US Federal Reserve has been raising its Funds Rate slowly, the last raise being in June. It signaled another 2 rises this year but did not raise rates in its last meeting in July Rising rates will strengthen the dollar further against all other currencies, including the renminbi. So price rises due to tariffs will be muted but the government will collect a lot more in taxes. The unemployment rate is down to 3.8%, which signifies that anyone who wants a job will find one. This means wages are likely to rise as companies deal with a shortage of workers. Rising wages and a strong dollar will compensate somewhat for the rise in prices of imports because of tariffs. A booming US economy is not good news for emerging markets as their currencies fall, as investors sell their bonds and stocks, wrote E Curran and L Meakin. A sentiment that was echoed by R Sharma. "The dollar is extremely strong and any country running a current account deficit is getting penalized, Turkey being the most extreme example." "If you look at the current account deficit of India and many other countries since 2013 when the taper tantrum happened, they have improved. But, whenever we have had a strong dollar, it has never been good for developing economies like India." Increasing strength of the dollar and the rising price of crude oil has hit the Indian rupee very hard. Indian politicians and economists think that India is a closed economy but a current account deficit of 3% and a combined fiscal deficit of 7%, between the center and the states, is bound to have a negative effect, wrote J Aziz. Trump is continuing with his policies despite enormous criticism. Probably because he knows that tariffs will not cause much inflation. 

The fear is we will be helpless this time.

"The current global expansion will likely continue into next year, given that the US is running large fiscal deficits. China is pursuing loose fiscal and credit policies and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession," wrote Prof N Roubini and B Rosa. Prof Roubini was labeled 'Doctor Doom' for predicting the subprime crisis in a speech at the International Monetary Fund in September 2006. People laughed at him at the time because the economy was doing well, but in September 2008 Lehman Brothers filed for bankruptcy, and the Great Recession followed. There are 10 causes for concern this time round. The fiscal stimulus of tax cuts in the US will run out by 2020, rising inflation will prompt the Federal Reserve to raise its Funds Rate, the Chinese economy will slow down, trade disputes will restrict the global economy, stock markets are too frothy, there will be a tightening of liquidity and central banks will not have the means for stimulating their economies because of "massive public debt". Although financial regulations have been tightened following the crisis of 2008 governments have encouraged banks and funds to increase their holdings of long term government bonds so that yields of these securities have fallen to very low levels, wrote Prof P Turner. Since the price of bonds is inversely related to yields banks and funds will suffer heavy losses if interest rates go up. Normally the price of bonds rises with increasing period of maturity because risks mount with time. This is known as the 'yield curve'. When short term yields are higher than on longer term bonds, the yield curve is said to have inverted, and this usually predicts a recession. The yield curve has become flat in the US. Former Prime Minister of Britain Gordon Brown warned recently, "We are in danger of sleepwalking into a future crisis." But, it was Brown who, as the Chancellor of the Exchequer, reduced regulations of banks which allowed them to engage in financial skulduggery. Record low interest rates maintained by central banks over such a long time has again encouraged financial engineering, wrote VA Nageswaran. "Leverage facilitates financial engineering, financial market speculation and unviable mergers and acquisitions." Emerging market risks have increased as enormous liquidity in developed countries has resulted in carry trades where speculators have borrowed in richer countries to invest in government securities in emerging market countries, wrote S Das. Although not warning of doom, Warren Buffett is not taking any chances and holding on to cash. Will Doctor Doom be right again? He has many supporters this time.

If only they could do it now?

The financial crisis triggered by the collapse of Lehman Brothers in the US led to widespread changes in the whole world, wrote I Bremmer. China was forced to reform its economy and Europe had to face a sovereign debt crisis in Greece. "A wave of unrest swept across North Africa and West Asia. A street vendor in Tunisia set himself on fire and within days the country's government fell. Egypt's Mubarak went to prison. Libya's Qaddafi was executed in the street. Yemen exploded into violence. Syria sank into a civil war that has killed or displaced half the country's population. Oil prices fell from $147 per barrel in the summer of 2008 towards $30 per barrel, shifting the international balance of power. The unrest in West Asia triggered a new crisis in Europe as more than two million migrants made their way north in search of safety and a better life -- transforming European politics by generating fear of insecurity and lost European identity. Angry fearful votes began to reject establishment political parties." In summary, ordinary people all over the world suffered while bankers, who created the crisis, were not only protected from prosecution but continued to earn huge bonuses. Tunisia has become a source of jihadi terrorists. The US and its allies supported terrorists in Syria with arms and money until Russia started supporting the Assad government. The sharp fall in the price of oil resulted in a sort of reverse resource curse. The Indian government increased excise duties on petroleum products to earn an extra Rs 10 trillion in the five years from 2014 to 2019. State governments joined in the loot of citizens by increasing VAT on fuel to nearly 40%. The money was used to distribute handouts to various sections of people to get their votes. Now that the price of oil has reached about $75, nowhere near the $147 per barrel as in 2008, the price of petrol at retail outlets is nearly Rs 90 per liter. Rs 6.37 trillion have been distributed to young people apparently to help them start new businesses, but could add to non-performing assets at banks warned former Governor of the Reserve Bank Raghuram Rajan. India needs to lower taxes on Air Turbine Fuel, or ATF, said the CEO of International Air Transport Association. The airlines industry in India may post losses between $1.65 and $1.90 billion. Once you start a handout it is impossible to stop it. The BJP won the assembly election in UP by promising waiver of loans to farmers. All farmers now accept that as the norm. So the Prime Minister has promised higher minimum support prices for crops. Having tied its hands the government cannot afford to provide any relief on petrol prices to the people for fear of adding to the fiscal deficit. In the US at least there is a debate about taxes. In India it is the same old story of increasing taxes in the name of alleviating poverty, classically exemplified by an income tax rate of 98.75% in 1970-71 under Indira Gandhi. They can't do that now. They would if they could. 

Cost of food for 1.3 billion people.

In extremely good news for the government, retail inflation fell to 3.7% in August from 4.2% in July and the Index of Industrial Production rose by 6.6% in July, compared to 6.9% in June, but much higher than 1% in July last year. Inflation is much below the 4% target set for the Reserve Bank of India (RBI) by the government. Wholesale prices also rose by a softer 4.53% in August, down from 5.09% in July. This is important because it may persuade the RBI to keep interest rate on hold. "While weakness to the rupee adds to the upside risk, factors such as still sanguine domestic food prices and moderation in global commodity prices (excluding oil) are likely to provide some relief," said G Kapoor. The upper reaches of Indian society, including politicians, economists and business tycoons, all believe that a low interest rate is essential for stimulating economic growth and bringing untold riches to the country. It is another matter that the riches tend to concentrate in the hands of a minuscule section of society, but we only get to hear their opinions. One supporter of the government, sort of an employee, wrote that claims of rising inequality is a myth and without any evidence. Which was demolished by P Chakravarty who analysed official income tax data to show that the Gini coefficient for India has risen from 48 in 2013 to 63 in 2016, making India one of the most unequal countries in the world. A Gini coefficient of 0 is perfect equality and 100 is totally unequal. The perilous condition of the economy was described as a "systemic collapse" by PS Jha. "A systemic collapse can result only from a systemic failure. In India, the RBI, has dealt it by imposing and then maintaining a regime of very high interest rates for industrial borrowers since 2010, regardless of the rate of inflation," he fulminated. The main reason for lower retail inflation is the fall in food prices which maybe good news for consumers but is very bad for farmers, wrote M Chakravarty. Core inflation, which strips out volatile food and fuel prices, has fallen from a high of 6.65% in January 2014 to 5.67% in August 2018. This is still too high. With around 58% of the population dependent on agriculture for their livelihood it is too large a vote bank for politicians to ignore. The government has guaranteed a 50% return over costs to farmers with an eye to general election by May 2019. But, the way the government calculates costs to farmers is 38% lower than what the farmers demand. Over Rs 3 trillion will be spent in waiver of loans to farmers from 2017-2019. Maharashtra has made it mandatory for traders to buy crops at Minimum Support Prices fixed by the government. All this will surely raise prices of food. And that will raise retail inflation. What happens then?

Is it better to panic early?

On the eve of Lehman Brothers anniversary our Finance Minister announced a series of measures to prevent a collapse of the rupee and the economy from tanking. Like what? Mandatory hedging of infrastructure loans in foreign currency maybe removed and companies will be allowed to borrow up to $50 million abroad in short term loans. Restrictions on investments in bonds of private companies by foreign investors and withholding tax on masala bonds, which are rupee bonds sold abroad, will be removed. But, bringing in more hot money without hedging surely exposes India to sudden reversal of flow if the Federal Reserve increases its Funds Rate faster, and Indian companies will face massive repayment bills if the rupee falls even more? The government will restrict imports of "finished electronics, certain textiles, automobiles and high-end consumer products like watches" to try and control our current account deficit. Electronic goods come second to oil in the amount of foreign exchange required. In the 13 months to May we spent $57.8 billion on import of electronic goods, way more than $35.8 billion for importing gold. However, if we reduce imports from any country they will retaliate by cutting things they buy from us. China promptly retaliated to US tariffs by imposing tariffs on the same quantity of imports from the US. "Restricting imports will achieve short term gains, if any, while there will be revenue loss due to customs duty foregone, apart from creating distortions in the market," said a tax expert. The government has already raised customs duty on 400 imported items by huge margins in the last two years. Despite high customs duty, imports from China have shut down hundreds of micro, small and medium enterprises, MSMEs, in India. Why blame China when the government's own tax demands have shut down hundreds of MSMEs, which cannot cope with the complicated Goods and Services Tax, resulting in thousands losing their jobs. The Prime Minister is calling for import substitution, asking people to buy goods made in India rather than imported ones. Import substitution will return our economy to a dirt track, wrote Prof A Panagariya. "India's currency weakened around 22% against the dollar between 2012 and 2017 and the compound annual growth rate in exports during the same period was a meager 0.2%," Wrote N Kwatra. So, the fall in the value of the rupee is unlikely to increase our exports because we import parts to make things we export. If the problems in Turkey are causing such problems, a devaluation of the renminbi in China will really impact India, said R Napier. When there seems no escape it is time to panic. That is what our government just did.

How many masters can they serve?

Former Chairman of the Central Board of Direct Taxes (CBDT) R Prasad has realised that "income tax law has to be made simple and the income tax department should be a service provider". Tax officers assume that every taxpayer is a cheat and are told that "when two views are possible, err for the benefit of revenue". In short, resort to arm-twisting and extortion. Officers are set tax collection targets. "When 90% of collection comes from advanced tax and TDS, 5% from self-assessment collections and only 5% from post-assessment collections, there is no necessity to allot collection targets to individual officers." When 95% of tax collections come from self-assessment and advanced tax, which means people paying voluntarily, why are we treated as criminals? TDS, or tax deduction at source, collects taxes from salaries and any income earned from investments, like term deposits at banks. People are meant to claim refunds for excess tax deductions. Last year, the tax department had to refund Rs 1.42 trillion, of which 92% were for sums less than Rs 50,000. Those, especially old people, who forget to claim a refund or claim less than they should, lose money. Thus, the government is deliberately stealing money from the most vulnerable section of taxpayers and employing an army of officers at exorbitant salaries to do so. Charming. "There are cases where such excessive demands are raised that taxpayers are not able to pay 20% of the demand. This leads to harassment in the form of attachment of bank accounts and properties. When the taxpayer wins in appeal, the files in respect of attachment are misplaced and taxpayers suffer more harassment." The tax department is the largest litigant in India and persists in filing frivolous appeals despite losing the vast majority of cases. Wasting taxpayer money to harass taxpayers, wasting vast sums in lawyers' fees and creating logjams in courts. There are other ways of coercing taxpayers. Anyone paying more than Rs 50,000 per month in rent is required to deduct 5% TDS, deposit it with tax authorities and provide a certificate, called Form 16C, to the landlord. Similarly, anyone selling a property for more than Rs 5 million has to deduct 1% TDS and go through the same process of providing a certificate to the seller. In short, we are forced to serve the government without getting anything in return. Over 50 million have filed tax returns this year, compared to 31 million last year. Whether the increase is due to the jump in salaries of civil servants because of the Seventh Pay Commission we are not told. Tax officials follow rules laid down by politicians and their promotions depend on their ability to coerce taxpayers. Prasad thinks that "income tax law has to be made simple and the income tax department should be a service provider". But, it is already a service provider -- for politicians. 

Why are pundits against common citizens of India?

"Indian industry is in meltdown. Seventy-eight of the largest companies in India are facing dissolution under the Indian bankruptcy code," wrote PS Jha angrily. "As if these woes are not enough, loan default by small companies have also doubled in the past year, signalling an imminent crisis in that sector as well. Are all owners and managers of these companies, and their bank managers corrupt, as the government would have us believe? The idea is absurd" So whose fault is it? "A systemic collapse can only result from a systemic failure. In India, the RBI has dealt it by imposing and then maintaining a regime of very high interest rates for industrial borrowers since 2010, regardless of the rate of inflation." Apparently, South Korea had an inflation rate of 21% for 3 decades during which it became and "industrial powerhouse" and China maintained "stringent price controls on essentials". Park Chung-hee, a dictator, is credited with the development of Korea's economy Inflation was high in the sixties and seventies, reaching a high of 28.7% in 1980, but was brought down swiftly after the assassination of Park. Whether this was a cause or an undesirable result of South Korea's rapid economic growth we do not know. China adopted a one-child policy in 1979 which prevented 400 million births, which allowed vast numbers of women to join the workforce, brought down labor costs and resulted in double digit growth. It was the Indian government which set an inflation target for the RBI at 4%, plus/minus 2%, and appointed a Monetary Policy Committee to oversee interest rates. Former Governor of the RBI Raghuram Rajan explained how indiscriminate lending by banks during the growth years of 2006-08 resulted in promoters borrowing vast sums of money they could not repay when growth slowed down after the subprime crisis. The subprime crisis in the US, which nearly caused a global economic meltdown, has been ascribed to unnecessarily low interest rates by the Federal Reserve, known as the 'Greenspan put'. Low interest rates help the government by keeping borrowing costs low, help the rich who can buy assets with cheap borrowed money, penalise savers and transfer wealth from the poor to the rich. Asking for lower taxes on fuel "is especially ill-advised today because emerging markets (EMs) like India are on the edge of a financial precipice, and must take care not to fall off," wrote SSA Aiyar. Aiyar says that there is nothing to worry about a falling rupee as other EM currencies are also falling and the government must not reduce taxes on fuel because that will raise fiscal deficit. Each government is responsible for the mess it has created and the Indian government has extorted over Rs 2 trillion by extra taxes on petroleum products when prices fell in 2014. Rajan warned that Rs 6.37 trillion Mudra loans handed out by this government and Kisan Credit Card loans could turn sour. Indian politicians believe that taxpayer money is theirs to waste. Perhaps it will be less harmful if we cut their wings a little.

Scrupulous respect for the unscrupulous?

More than a million Uighurs have been imprisoned in a massive internment camp in the western Xinjiang autonomous region in China, said a report from the UN. "We are deeply concerned at the many numerous and credible reports that we have received that in the name of combating religious extremism and maintaining social stability (China) has changed the the Uighur autonomous region into something that resembles a massive internment camp that is shrouded in secrecy, a sort of 'no rights zone'," said G McDougall. In 2015, China banned Uighur Muslims from fasting during Ramadan and ordered restaurants to stay open, although how they knew whether anyone has eaten or not is a mystery. In 2017, men were banned from growing beards and women from wearing veils, children compelled to attend state schools where they could be brainwashed, passports were confiscated and every car forced to install GPS trackers. This is nothing. China almost wiped out the Falun Gong, which is a sort of quasi religious meditation, seen as a threat to the supremacy of the Communist Party. Most gruesome, Falun Gong members were arrested, imprisoned in secret jails and then they were executed  and their organs harvested, as required. Sometimes organs were harvested from living people. However, China does not ban Tai Chi, maybe because it is practiced only by the elderly. The state-run newspaper Global Times claimed that the government has prevented a great tragedy in the Xinjiang region by stopping Islamist militants from attacking the majority Han Chinese. Prompt action by the authorities has prevented the Xinjiang region from becoming another Syria or Libya, said the newspaper. Even foreign nationals are not safe, as a citizen of Kazakhstan discovered. "The Trump administration is considering sanctions against senior Chinese officials and companies to punish Beijing's detention of hundreds of thousands of ethnic Uighurs and other minority Muslims in large internment camps, according to current and former American officials," wrote E Wong. China has warned the UN High Commissioner for Human Rights Michelle Bachelet that she should scrupulously abide by the mission and principles of the UN charter" and "respect China's sovereignty, fairly and objectively". Why has the US suddenly woken up to the barbarous Chinese? China is shutting churches, destroying crosses and burning bibles in a bid to wipe out any form of religious sentiment. Evangelical Christians are a solid support base for Donald Trump despite the many accusations against him. China always retaliates to perceived insult so we shall see if it levies sanctions against US officials and companies. Chinese communists against the US God, who to trust.

Not the foreign devils, but our homegrown ones.

The tenth anniversary of the collapse of Lehman Brothers, which led to the subprime crisis in the US and to panic on global markets, will be on 15 September. This led to "the empowerment of the central banks. The role they played in staving off the crisis -- which in itself was remarkable and commendable -- transformed the status of central banks, which acquired regulatory independence only a few decades ago," wrote A Padmanabhan. "The big question is whether it is fair? After all central banks are manned by technocrats and not by elected politicians." "Although this should have been the moment for the representative governments to rise to the occasion, too often political leaders failed to take actions needed to preserve the welfare of those who elected them," wrote F Giugliano. "The institutions that did the most to help economies recover were the most technocratic and without popular mandate: the central banks." "So, the power of central bankers is here to stay. When the next crisis hits, politicians -- even those with popular mandates -- will depend more than ever upon the whims of unelected technocrats." Showing his displeasure at record low interest rates, former UK Foreign Secretary William Hague wrote, "Central bankers have collectively lost the plot. They must raise interest rates or face their doom." To which Bank of England Governor Mike Carney replied, "The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side." In a snub to the Finance Ministry, and hence to the government, officials of the Reserve Bank of India refused to meet ministry officials before a meeting of the Monetary Policy Committee of the RBI last year. Now government officials are trying to pressure the RBI to sell dollars to support the rupee which has fallen 13% year-on-year against the dollar. "If you look at the domestic economic situation and global situation, there are not domestic reasons attributable to this, but all reasons are global," said the Finance Minister. But of course he has no idea because he is a lawyer by trade, and not a 'technocrat'. Foreign devils did not impose huge taxes on petroleum products when the international price of crude was very low and waste taxpayer money with abandon so that India is now in the tentacles of a 'twin deficit problem'. Previous Governor of the RBI Raghuram Rajan has gone back to his post of professor at Chicago, and the present Governor Urjit Patel will easily find a prestigious post if he is forced out but Indian politicians are otherwise useless. Politicians are asking for the RBI's powers to be reduced. They should beware. They may have to beg the RBI to save them when the next crisis hits. Which could be any moment.

What is the gain in formalizing jugaad?

Since the Goods and Services Tax became law in India, hundreds of thousands of people have lost their jobs. "India's unemployment rate rose to 6.4 percent in August from 4.1 percent in July last year despite an additional 17 million people joining the workforce." "A survey by the All India Trade Union Congress (AITUC) found that a fifth of India's small businesses -- contributing 32 percent to the economy and employing 111 million people -- faced a 20 percent fall in profits since the GST rollout, and had to sack hundreds of thousands of workers." Small businesses cannot cope with the complexity of GST and many were not paying taxes, such as sales tax and excise. GST is meant to formalize the economy and 'widen the tax base'. "Historic tax reform GST has resulted in formalisation of the economy and consequently information flow would augment not only the indirect tax collections but also direct tax collections," said the Ministry of Finance. India's labor laws are extremely stringent and make it almost impossible to set up a large company. The result is that our businesses prefer to import from other countries than having to manufacture in India. Over 10 million young people are joining the workforce every year and they have to find suitable employment. "There is a school of thought that is concerned about the extremes of capitalism that have given rise to morally reprehensible practices by large enterprises," wrote E Ghani of the World Bank. "The popular perception is that small enterprises are a diversion from creation of good jobs." But, in India, "Empirical evidence suggests that there are strong positive linkages, and spillovers, between small and large enterprises. They are friends and not foes." "A 10% rise in employment of unorganized sector suppliers increases the employment of organized sector buyers by 16%." Despite being the fastest growing large economy in the world India is unable to grow its middle class because of a dearth of high quality jobs, wrote A Nag and V Beniwal. "India has created big wealth for a limited number of people at the highest income levels, but it hasn't created a massive pool of customers by creating hundreds of millions of middle income class," said J O'Neill. "So, if you think India has a jobs problem, you will throw money from helicopters (NREGS), mandate a three-day working week (lump of work fallacy), and replace the shovels of digging workers with spoons (productivity be damned). I'd like to make the case that India's official unemployment rate of around 5% is not a fudge because everybody who wants a job has a job; they just don't have the wages they need," wrote M Sabharwal. "India is a nation of enterprise dwarfs; we have 63 million enterprises of which 12 million don't have an address, 12 million work from home, only 6.4 paid indirect taxes till GST, only 1.2 million pay social security, and only 18,500 companies have a paid-up capital of more than Rs 10 crore." As people lose jobs they will resort to jugaad to survive. The tax base may widen but jobs will shrink. That is India.

They have eyes but do not see.

In recent weeks the Turkish lira has fallen sharply against the dollar but regained some of its losses yesterday in expectation of a rise in interest rate. Markets are expecting a hike of 500 basis points at least, so anything less will trigger another fall. Turkey's President Erdogan said that a rise in interest rate is the "mother and father of all evil". That was in May when the dollar bought 4.3080 lira. Today a dollar buys 6.4167 lira which has pushed consumer inflation to 18%. In order to shore up its foreign exchange reserves and support its currency the government ordered exporters to convert all their earnings into the local currency. This is a one time grab because now exporters will have no money to buy raw materials to manufacture their goods. "What explains the fastest growing G20 economy in 2017, with an external debt to gross national income ratio of only 47.8% and ranked only a distant eighth in the top 20 Developing Debtor Countries (World Bank, International Debt Statistics, 2018), slipping and becoming the latest villain in the global growth story?" asked Prof T Jayakumar. "This is even more surprising when compared to countries that fare far worse on their external debt metrics, including Kazakhstan (135.1%), Ukraine (127.8%), Bulgaria (76.4%) and Malaysia (69.6%)." Erdogan should look at Argentina where inflation is at 30%, despite interest rate at a shocking 60%, and the peso is down 52.4% against the dollar. A large part of Turkey's debt "was fuelled by cheap international credit, borrowed by companies and mostly denominated in hard foreign currency". This has been named the "original sin". "Economists Barry Eichengreen, Ricardo Hausmann and Ugo Panizza in 2003 used the term 'Original Sin' to refer to the inability of a country to borrow abroad in its own currency." If you cannot borrow in your own currency you cannot repay in your own currency so when your currency falls your debt suddenly balloons. What about India? "India, with an external debt to GDP ratio of 20.4%, seems to be less vulnerable and is in a fairly safe spot." "India's non-governmental external debt (at 80.6% of the total) far exceeds its sovereign external debt (at 19.4%). External commercial borrowings, with a share of 38.2%, constitute the highest component of external debt, while 49.5% of India's external debt is dollar-denominated." There are other red flags. India's trade deficit in July was the highest in five years at $18 billion. Naturally the current account deficit, which is the difference between imports and exports, is at 2.4%. The rupee has fallen from about 62 to the dollar in 2014, when this government was elected, to 72 today. If oil and the dollar rise further, inflation will soar and the rupee will come under huge pressure. All this is nothing new, just have to look at other economies. Sadly, politicians don't want to see.