Do RBI governors know so little?

"I am being lectured on the Reserve Bank of India's (RBI's) balance sheet by this eminent group of current and former RBI officials, and the hordes -- especially the fawning elites in journalism, TV, financial community, etc -- are cheering them on," wrote Arvind Subramanian, previous Chief Economic Adviser to the Government of India. "I respond with my arguments. The eminences are dismissive. Suddenly Ben Bernanke and Mario Draghi appear. They had been bold in deploying their balance sheets during their respective financial crises. taking risks that eventually paid off." "'This is such a no-brainer," they say. "Obviously, you should do whatever it takes." A DPhil from Oxford, a former economist at the IMF and fellow of two institutes in Washington DC, Subramanian ticks all the boxes of a super elite. What does he know that all the present and former governors of the RBI don't? He thinks that the RBI should transfer Rs 4.5-7 trillion to the government which would use the money to recapitalize public sector banks which are sitting on bad loans in excess of Rs 10 trillion. The RBI has accumulated Rs 9.6 trillion over a period of decades, to be used in an emergency. It was because of a vigilant RBI that India could avoid the financial crisis in 2008, which nearly brought down the banking systems in the US and Europe, wrote J Nocera. "India had a bank regulator who was anti-Greenspan. His name was Dr YV Reddy, and he was the governor of the Reserve Bank of India." "Did India's bankers stand up to applaud Mr Reddy as he was making these moves? They were naturally furious, just as American bankers would have been if Mr Greenspan had been more active." Public sector banks were used by the Congress to finance pet projects, labeled "telephone banking" by Prime Minister Modi. It will cost an estimated Rs 2.7 trillion to finance Modi's loan waiver for farmers, to win elections. Perhaps, we can call it 'megaphone banking' because it was announced openly and not over a phone. Another Rs 6.37 trillion have been dished out to young people as loans to start new businesses. This government earned Rs 11 trillion in windfall gains by taxing oil products as prices fell from over $100 a barrel to around $30. If Modi has wasted this humongous amount on handouts, can Subramanian guarantee that he will not waste the bonus from RBI to win the forthcoming general elections? Bankers have been known to dispense loans in return for bribes, so bailing them out so easily may encourage them to indulge themselves. Finally, the Eurozone has a GDP of $18.8 trillion and the US dollar is the official currency of 7 countries in addition to the US. It is because of the Federal Reserve and the European Central Bank that global debt has risen to $182 trillion, 225% of global GDP. Perhaps. RBI governors know more than Subramanian. Possible.

It's never straight forward, is it?

The Indian economy is expected to show robust growth in GDP in the second quarter, following the 8.2% growth in the April-June quarter, wrote N Kwatra. Mint has launched a Macroeconomic Tracker that "uses 16 high-frequency indicators to gauge the health of the Indian economy. According to the latest figures, nine of the 16 indicators are in the red -- performing worse than the five year trend." On the plus side, the Purchasing Managers' Index (PMI), sales of two-wheelers, rail freight traffic and bank non-food credit are up, while consumer inflation is down, giving a fillip to outlook for jobs. Retail inflation fell to 3.31% in October from 3.70% in September, well below the target of 4% set by the government for the Reserve Bank (RBI). Indian politicians, civil servants and business fellows have a profound faith in lower than low interest rates as a solution to all economic problems, so a falling inflation should be fantastic news because it puts pressure on the RBI to reduce rates. But, there is a little problem. "Since the August policy, food inflation has surprised dramatically on the downside. Seasonal pickup in prices of vegetables and fruits in summer months was simply missing due to a combination of increased mandi arrivals, export policies and other supply management. This, coupled with a normal monsoon, has shifted RBI's food inflation projections significantly lower," said RBI Deputy Governor V Acharya. Poor people spend over 50% of their earnings on food and even then there is a vast gulf in the nutrition value of food consumed by the lowest and highest 5% of the population. Low food prices should be good news for the government because they help the poor. With 58% of our population dependent on agriculture for survival, low food prices are a disaster for our farmers who are unable to recover their costs. As of now, thousands of farmers from across the nation have collected in Delhi to demand an escape from poverty. They borrow to buy seeds, fertilizers and pesticides and when prices fall so low they cannot repay their debts and may end up as bonded labor. The main reason for low inflation is " the unprecedented deflation in agricultural commodity prices in the last four years," wrote Prof Himanshu. "One of the immediate confirmation of the severe demand deflation in rural areas is the decline in real wages which have now fallen for the last eight months." So much for the good news. On the negative side, growth in passenger vehicle sales, tractor sales and in domestic air passengers in down. The rupee is down against the dollar, rural wages have fallen 3.6% year on year, core CPI is still at 6.2%, and trade deficit and current account deficit are increasing, wrote Kwatra. General elections due in 5 months. Can our dear leader bluff his way out of this?

May should visit India to learn horse trading.

After months of negotiations, Britain and the European Union (EU) have reached a deal for Britain's exit from the EU, dubbed Brexit. However, there are still many problems to be sorted out. Details on trade have to be sorted out as Britain wants open trade with Europe, as well as the right to make independent deals with other countries. Britain has to pay 39 billion pounds and there will be a 2 year transition period, which maybe extended for another two years. During that time Britain will have to abide by EU rules without having any say in formulating those rules. France has demanded the right to fish in British waters, without which it will not allow conclusion of the deal. The biggest problem is the land border between Northern Ireland, which is a part of the United Kingdom, and the Republic of Ireland, which is part of the Eurozone. This is the only land border between Britain and the EU and Britain and the Irish want to avoid a hard border, with customs and immigration checkposts separating the North from the South. Britain wants the whole nation to remain within the customs union for a fixed period but the EU wants separate rules for the border, known as the backstop, which will effectively separate Northern Ireland from the rest of Britain. This has upset the Protestant Democratic Unionist Party (DUP) whose support is crucial for Prime Minister Theresa May's minority government. May has warned the DUP that if it does not support the deal there maybe a backstop to the backstop. A government report says that Brexit will result in a 3.9% contraction of the UK economy in 15 years but a no-deal, or hard, Brexit will result in a 9.3% fall. Hard line members of May's Conservative Party, who do not mind a no-deal Brexit, have dismissed these calculations. The Bank of England warned that a no-deal Brexit would result in an immediate contraction of 8% in the British economy, the pound will crash and house prices will fall by 30%. Conservative MP Jacob Rees Mogg called the Bank's report "project hysteria" and labeled the Governor Mike Carney "a second tier politician". May has defended her deal as the best possible and the alternative is a hard Brexit, with catastrophic results. Any Brexit deal will be worse than no Brexit for the British economy. Is there a Plan B? That is the 'Norway model' which has free trade with the EU without being a member. But that involves free movement of people. Trouble is, that people voted for Brexit in the referendum in 2016 because they want to stop immigration. At the time of the referendum no one, including politicians, knew what the economic cost is going to be and the complications of the Irish backstop. Wouldn't it be more democratic to have another referendum after the pros and cons are simply explained? Conservatives don't want one but Labour may support the idea, hoping to bring down the government and force a general election. In India the ruling party would have distributed sackfuls of taxpayer cash to win over MPs. The Brits should learn from us.

Cannot have a full Chinese model in India.

"The good thing about the last four years is that the masks are off," wrote M Chakravarty. "There's no question of the ruling party being just for vikas or development. What we get is vikas as a subset of Hindutva." "It is a counter-revolution where nationalism, tradition and religion are used to paper over the gross inequalities, rampant exploitation and the glaring contradictions of Indian society." Prime Minister Modi has made "an attempt to emulate the East Asian model of development, particularly the Chinese model". Every East Asian state had an autocratic government during their period of rapid growth. So Modi forced every Indian to obtain an individual number, based on photographs, iris scans and fingerprints, as in a concentration camp. This supersurveillance was imposed on citizens without consultation and sneaked through the parliament as a money bill. We have not been told the cost of this project so the cost has to be calculated through educated guesswork. Emulating China, "A 'long march through the institutions' is taking shape, with adherents to the regime's ideology being put in places of power." "Who is benefiting from these policies? "Big business, both national and international, is solidly behind Modi." India has jumped 53 places in two years in the World Bank's ease of doing business index but B Anand found that he has to submit 57 documents to obtain permission to open a restaurant in Delhi. Taxes are exorbitant, rules are vague and "they are plagued by arbitrary changes in rules". "Out of the 12 departments that regulate the operations of a restaurant in Delhi, only one has published a guidance document." "Businessmen who pay the one-time costs and obtain the licenses are then subjected to unclear and arbitrary inspections and rule changes." Scope for inspectors to demand bribes. Who would want to invest in a country where tax demands are based on whim and in violation of our tax laws? asked AP Datar. India lost a number of tax arbitration cases and so decided to change Bilateral Investment Treaties unilaterally. "Apart from repeated retrospective tax amendments, demands made by the tax department are often made only to meet revenue targets." "In the case of Nokia VAT (value-added tax) authorities of Tamil Nadu shockingly treated export turnover to the extent of Rs 26,000 crore -- and for which forex had come into India -- as 'inter-state sales'. This was then made liable to tax at 12%!" Nokia shut down the factory losing 8,000 jobs, so Tamil Nadu lost out on future taxes as well. While billions have been spent on snooping on citizens bank frauds have risen by 20% in the past two years. While emulating China on suppressing opposition Modi has spent over Rs 30 billion on building a statue while China has built a giant air purifier capable of cleaning air in a 10-12 km radius. We have the most polluted cities in the world. "And in a society where the richest 10% own three-quarters of the nation's wealth, talk of inclusive development is hogwash," wrote Chakravarty. Maybe, but opportunities for social schemes are immense. They win elections.

Ignore Pakistan to make it go away.

"The tenth anniversary of the Mumbai attack on 26/11 has had the usual political response. The standard praise for those who lost their lives, a strict warning to terrorists, some identity politics played using Pakistan and Islamic terror as targets, and finally praising the spirit of Mumbaikars," wrote Prof S Rajagopalan. Mumbai has a population of 13 million and another 4 million come into the city everyday to work. The total sanctioned police force is 50,465, but with 17% vacancies there are 41,955 personnel. About 20,000 to 27,000 are dedicated to protecting VIPs, leaving just 20,000 for Mumbai citizens, which is 1 policeman for 650-850 people, against a UN recommendation of 250 policemen for every 100,000 people. New York police has a budget of $5 billion (Rs 350 billion), while the budget for Mumbai police is a paltry Rs 134 billion. So they are supplied with substandard bullet proof vests. All politicians in India have a callous disregard for citizens. The Mumbai attack took place in November 2008 and before the funeral pyres had a chance to cool the then Prime Minister Manmohan Singh was in Sharm el-Sheikh shaking hands and smiling at cameras with Pakistan Prime Minister Yousaf Raza Gilani, in July 2009. Mocking India, Shah Mahmood Qureshi said, "Pakistan is willing to talk in a united voice; Pakistan has no malice in its heart; Pakistan is not afraid to talk; we are willing to sit at the table and we know how to present our position." "If it has been agreed and committed to that dialogue is the only way forward, what's there to feel shy about." This government has been bragging about a 'surgical strike' on terrorist camps within Pakistan on 26 September 2016, following an attack on an Indian army camp at Uri on 18 September. Politicians are adept at taking credit without taking any risk. Soldiers were sent across the border and had to find their way back, trying to avoid death as the angry Pakistanis resorted to heavy firing. Prime Minister Modi has been milking the surgical strike for political gain, but did it reduce terrorist attacks? There were 174 deaths due to terrorism in 2015 in Jammu and Kashmir, which went up to 267 in 2016 and 358 in 2017, wrote A Patel, who is no friend of Modi. There have been 339 deaths already this year. So what is the government going to do? It has begged Pakistan to give up double standards and has gratefully acknowledged US demands for the perpetrators to be punished. Because even after ten years have passed our preparations have been shoddy, with intelligence agencies not communicating with each other. We must declare Pakistan a terrorist state, cut off all relations, seal the border and shoot at anything that tries to cross it. Without India as an excuse Pakistan will collapse. The problem will disappear.

Do we stand a chance against Artificial Intelligence?

Artificial Intelligence (AI) will gradually take over human functions, wrote L D'Monte, with machines "predicted to be better than us at translating languages by 2024, writing high school essays by 2026, driving a truck by 2027, working in retail by 2031, writing a book by 2049 and surgery by 2053". Scientists are constructing neural nets modelled on the human brain, comprising of "thousands or even millions of simple processing nodes that are densely interconnected". Can AI go rogue? "In June 2017, two AI chatbots developed by researchers at Facebook Artificial Intelligence Research (FAIR), with the aim of negotiating with humans, began talking to each other in a language of their own since the rules of the English language did not suit the bots." Scary. The program was shut down. "Before AI achieves singularity, it will be a horror," believes S Pai. A majority of countries at the United Nations' Convention on Certain Conventional Weapons (CCW) wanted a ban on fully autonomous weapons systems but were prevented from doing so by countries such as Australia, Israel, Russia, South Korea and the US. Politicians think that by researching ever more lethal ways of killing they can stay ahead of the race but baddies inevitably catch up. Already terrorists are using drones and even customizing them to drop bombs on armed forces. The FBI warned of "steadily escalating threat" of civilian drones being used for attacking government installations. The human brain has 86-100 billion neurons, with multiple connections, with a volume of about 1500 cubic centimeters. Will they be able to invent an artificial brain where microprocessors are packed into such a small volume without overheating? The refusal of countries to accept a ban on fully autonomous weapons at the CCW maybe because of a fear of getting swamped as fertility levels fall drastically in richer countries while continuing unchecked in poorer nations. Thousands of migrants massed at the US border with Mexico maybe a sign of worse to come. Europe has not found any solutions to its crisis of migrants from Africa. European leaders are paying countries to stop their citizens from migrating by helping them to improve their economies. But this will only make the crisis worse as economic growth in low income countries tends to encourage migration, especially when combined with very high fertility. As migrants look for a better life in the US, climate change will make life much tougher for residents. The US has no control over deforestation of the Amazon rain forest but the resulting change in climate will create even more refugees. Will the US and Europe start using armed robots with AI to keep migrants out? Could happen.

Even the real bandits admire them.

Politicians are high-tech bandits, say the retired bandits of Chambal in Madhya Pradesh. "We fought for the rights of workers and farmers and those humiliated by caste abuse. Today netas have so much money they seem to have machines printing cash in their homes," said former bandit Malkhan Singh. "Today's netas are crorepatis. Win one election, they become tycoons overnight," said BS Tomar, nephew of notorious bandit Paan Singh Tomar who was killed in a shootout with the police in 1981. Although bandits have gone the elections in those areas are being fought by criminals and local toughs. India is proud to have the largest number of VIPs in the world. Apparently only 450 are provided with armed guards, which is not true because IAS officers are provided with official cars with red beacons and armed guards for their homes. There are about 4,800 IAS officers in India. In an indication of the number of VIPs the government is to issue 12,000 tags for their cars so that they do not have to pay toll on highways. Meanwhile our soldiers are dying because of faulty ammunition from a factory in Maharashtra. The armed forces are not using a type of anti-aircraft guns due to fear. All ordnance factories are owned by the government so they are allowing the production of defective ammunition. It is well known that political parties are happy to put up criminals as their candidates for election because they have the money to buy votes and the goons to intimidate opponents, wrote S Shekhar. But he goes on to spread the blame on to ordinary people. "We may not have given birth to these Frankensteins, but people like you or me are the ones who nurtured them." Politicians are very happy to be given a way out by experienced journalists like Shekhar. Those who commit high level crimes are allowed to flee the country and stringent rules are enacted against ordinary people. Why do people vote for criminals? They vote deliberately for criminals because they are able to deliver services that the state should be providing anyway, found Dr M Vaishnav. The problem is that there is no standard for services in India so companies are able to get away with shoddy services, wrote R Kher. When criminals get to become lawmakers it is only natural that they will control the police. It is common practice for the police to refuse to register a crime committed by a politician or his family. The Supreme Court has just realised that 46% of post in forensic labs are lying vacant. When criminals are not going to be apprehended or imprisoned why waste money on forensics? When RK Kapoor writes that there was more freedom under British Raj it is a tragic indictment of the Indian state. There is no solution. We will still be discussing this in the next century.

Who would want to be in Trump's shoes?

The CIA believes that the order to kill Jamal Khashoggi inside the Saudi consulate in Istanbul must have come from the Crown Prince of Saudi Arabia Mohammed Bin Salman (MBS). Their conclusion is apparently based on a couple of phone calls, one by the brother of MBS and another by one of the alleged killers. US President Donald Trump has refused to take any actions on the CIA report saying, "They have feeling certain ways. I have seen the report, they have not concluded, I don't know if anyone's going to be able to conclude the crown prince did it." Trump has claimed that his defence deal with Saudi Arabia will create lots of jobs for Americans but the actual figure maybe far less than suggested. Saudi Arabia has warned that its royal family is a red line. "The custodian of the two holy mosques (King Salman) and the crown prince are a red line," said Foreign Minister Adel al-Jubeir. Over the years the CIA has missed extremely important events, including the Tet offensive in Vietnam, the Iranian Revolution and the Soviet invasion of Afghanistan. Much worse, its plans to assassinate Fidel Castro of Cuba were so amateurish and comical that they would not have been out of place in a Billy Bunter story. The real reason for Trump's reluctance to blame MBS maybe because of oil. Trump thanked the Saudis for lowering the price of crude oil which had climbed to over $80 a barrel but is now trading at below $60. Lower prices of oil will reduce inflation in the US and may deter the Federal Reserve from raising interest rates. The Fed has raised its Funds Rate three times this year, which now stands at 2-2.25%, but held off at its meeting in November. Trump wants the Fed to lower rates because it will encourage borrowing and stimulate the economy due to increased consumer spending. "I'd like to see the Fed with a lower interest rate," he said. "I think we have much more of a Fed problem than we have problem with anyone else." The problems with that kind of thinking is that household debt in the US has soared to $13.29 trillion, which is higher than the $12.68 trillion that precipitated the subprime crisis. Lower oil prices will hurt the shale oil industry in the US, which will hurt jobs. Increased consumer spending will suck in more imports, even as a strong dollar hurts exports, and increase US trade deficit, which is rising already. Finally, lower price of oil hurts Trump's friend Saudi Arabia whose economy is dependent on oil exports. Saudi is planning to cut oil output by 1 million barrels per day to put a floor under prices. Will Trump suddenly wake up to involvement of MBS in Khashoggi's murder if that happens? Poor Trump, life is not easy.

Indian dreams end at government jobs.

"More than a quarter century after the liberalization of the economy and the burial of socialism, government jobs seem to be back in favour among India's aspiring classes," wrote P Bhattacharya and S Devulapalli. "But there is an even greater paradox in these demands: the most intense agitations for quotas in government jobs have been some of the most industrialized states: Gujarat, Maharashtra and Haryana." These three states, along with Karnataka and Tamil Nadu, "account for half of the country's industrial workforce, and also a majority of the new workers recruited since 2000-01, data from the Annual Survey of Industries (ASI) shows". Trouble is, the bulk of workers in Gujarat, Maharashtra and Haryana are contractual workers, who are paid less and are unsure of their jobs. Jats in Haryana, Patels in Gujarat and Marathas in Maharashtra are upper caste and well off but not well educated so they are agitating for government jobs. Half of all government jobs and seats in higher education are reserved for so called lower castes, it is 69% in Tamil Nadu. Naturally this angers other groups, who are struggling economically and who see it as unfair, so they are also agitating for their own quotas in government jobs. With 4.75 million joining the workforce every year jobs are most important for the young, but employment growth in the private sector fell from 4.2% last year to 3.8% this year. A study found that unemployment rate has increased to 6.9% in October 2018 and the labor participation rate, which measures the proportion of adults willing to work, has fallen to 42.4%, the lowest since January 2016. Figures for girls are even more dismal. Over 60% of girls are married by the age of 20 years. Only 3% of women have postgraduate degrees, while 60% have not finished high school. 75% of girls want to work but only about half are working or looking for work. Lack of employment opportunities creates a bottleneck for those wishing to escape from agriculture which employs over 40% of the workforce, wrote R Kishore. Which is what the Jats, Patels and Marathas are angry about. Only 10% of farmers have any financial savings or investments, wrote D Jain. "Given their low income, a few individuals have savings that would allow them to tide over contingencies and difficult circumstances." No wonder this government has stopped official surveys of employment levels in India, wrote Prof Himanshu. When people have no jobs hiding data will not stop them.

Can the Reserve Bank go broke. Yes it can.

In view of the recent tension between the government and the Reserve Bank of India (RBI), A Mukherjee asked a very pertinent question, "Can a central bank really go broke?" For those of us who are not economists the answer is an unqualified yes. Eight countries have defaulted on their debt since 2001 which means that they were bankrupt, just as Sears Holdings Corp declared bankruptcy for not being able to service its debts. The RBI is holding nearly Rs 10 trillion in reserves, of which Rs 2.3 trillion is its contingency fund and Rs 7 trillion is revaluation of gold and foreign currencies. In the government's view that is excessive and it wants the RBi to transfer Rs 3.6 trillion, with the general elections in May 2019. If the RBI resorts to printing money to meet its liabilities it could result in hyperinflation, as Venezuela is experiencing. The RBI cannot reduce its assets without reducing its liabilities which would severely reduce liquidity in the economy. "The trouble is that the central bank can't reduce one side of the balance sheet without a concomitant decrease in the other. Raiding a little more than half of the $95 billion foreign-currency and gold revaluation account, would from a risk-management view, force the RBI to sell an identical portion of the related assets, or $190 billion. That would trigger a 'cataclysmic deflationary shock' for the economy, as VK Sharma, a former central bank executive director, noted in the Business Standard recently," explained Mukherjee. The previous Governor of the RBI Raghuram Rajan explained how the RBI earned its profits because it pays no interests on its liabilities. It transfers those profits to the government. "So we earn a large surplus profit, more than all the public sector put together, because of the RBI's role as the manager of the country's currency. This belongs entirely to the country's citizens..." Therein lies the problem because politicians in India believe that taxpayer money belongs to them. In a shameless election gimmick the Chief Minister of Chhattisgarh is to distribute 5.5 million smartphones for free. Which means free access to pornography and a possible increase in rapes. There were rumors that the Governor of the RBI Urjit Patel may resign which would have set financial markets on fire. The RBI has built its reserves over decades and there is no reason why this government should take it by force to win an election, wrote L Venkatesh. Why is the government so desperate? Because revenue from the Goods and Services Tax is short by Rs 1 trillion and 38.6% of direct taxes have been raised in the 6 months to 30 September. A compromise was worked at the RBI board meeting on 19 November but it may not hold. If oil prices start rising again, putting pressure on the current account deficit, politicians and civil servants will be out to suck blood. To hell with the economy.

Arguments for Mexico do not apply to India.

When an action born of good intentions has harmful effects it is a mistake and a costly way to learn," wrote Prof R Hausmann. "A case in point is the decision by Mexican President-elect Andres Manuel Lopez Obrador (AMLO) to lower the salaries of the higher echelons of the civil service, including himself, capping them at $5,707 per month. It showed that AMLO was committed to fiscal austerity and income inequality." Why is it a mistake? Because government services are more "skill-intensive" and so "government employees have significantly higher levels of schooling -- four more years, on average, in Mexico". Since private firms pay very high salaries to CEOs so the government has to compete to attract top talent. Not in India. Here salaries of civil servants are much higher not only compared to the private sector but also compared to the armed forces who risk their lives daily to protect us. So great is the demand that MBAs, engineers and lawyers applied for jobs as drivers at the Gujarat High Court and 50,000 graduates, 28,000 post grads and 3,700 with PhD degrees applied for jobs as peons in Uttar Pradesh. Why? Not only are civil servants very highly paid with healthcare and pensions for life but they have huge opportunities to augment their incomes through corrupt means with complete immunity. Anyone bribing a government official faces 7 years in prison but no government official can even be investigated without permission of the government. This privilege has been extended to retired employees by the present anti-corruption government. No wonder India regularly wins the prize for being the most corrupt country in Asia. At the top of the administration is the Indian Administrative Service, or the IAS, perhaps the most pampered civil service in the world, with powers of a feudal lord. Not only very high salaries but the list of perks would make any CEO of a private company jealous. Since civil servants are in post for years, while politicians may come and go, civil servants teach politicians how to game the system and make money through corruption. To improve the quality of administration the government proposed recruiting experts directly in top levels of government, called 'lateral entry'. To which a retired IAS officer wrote that the service is a "powerful magnet for competent, capable and proficient graduates" who are attracted "in spite of increased job opportunities of the corporate world". It needs brains to get away with corruption and punishment in the private sector is quick and severe. High salaries for good people works in Mexico but not in India. They are still corrupt.

Will the war continue? We hope so.

"China's vaunted economic managers aren't infallible -- and they're currently making a familiar mistake," wrote A Polk. The government is sending mixed messages as "they're instructing banks to continue improving risk management and balance sheet control, even as they push out an increasing portion of their loans to small businesses. The latter carry higher credit risk, almost by definition." The Indian government is to force public sector (PSU) banks to facilitate loans of up to Rs 10 million to small and medium businesses (MSMEs) in less than an hour. This despite bad loans at PSU banks rising to 15.6% of total loans, according to the Reserve Bank. Total bad loans at listed banks is in excess of Rs 10 trillion. Bad governments seem to react the same way. Small, city level banks were ordered to increase loans to small businesses by Pan Gongsheng, a deputy governor of China's central bank. But these small banks borrow from the inter-bank market which is contracting because of measures to reduce risks in the banking system. Profit growth of Chinese companies is falling and debt levels are shrinking. "Easy access to funds had long fueled growth for mainland Chinese firms but a concerted campaign by authorities to rid the financial system of excess liquidity and rein in irrational corporate expansion is taking its toll." Then there is the trade war between the US and China. The just concluded APEC summit in Papua New Guinea ended with no joint statement at the end because of a war of words between Chinese President Xi Jinping and the US Vice President Mike Pence. Pence accused China of "tremendous barriers" and "tremendous tariffs" and "as we all know, their country engages in quotas, forced technology transfer, intellectual property theft, industrial subsidies on an unprecedented scale". Xi defended China's right to do all that. Trump may meet Xi at the G20 conference in Buenos Aires later this month, but after the bad temper shown at the APEC summit little is expected. The actual worry of the US is that China is going to overtake it in technology, by stealing trade secrets through spies, by hacking, and by inserting malware capable of diverting information into telecom equipment, wrote N Chanda. Xi Jinping is the man responsible for the cold war between the US and China and the US would have reacted even if Trump was not the president, wrote M Schuman. US presidents have been kowtowing to China since Richard Nixon, wrote B Chellaney. Obama was not given a staircase to descend from his aircraft and had to use a rear exit. We hope that Trump is able to hit the Chinese where it hurts.

Shouldn't waste his genius, should he?

"Is it true then that the Indian economy is headed for a serious crisis? asked Dr S Swamy. "Yes, that is a reality." Why? "One, the growth rate of the economy with proper index number-based GDP has declined over the last two years." The economy grew by a scorching 8.2% in the first quarter of this financial year. The base year for calculating GDP growth was shifted to 2011-12 from the earlier base year of 2004-05. Because of this change "India's data is puzzling and is prompting economists to find a workaround", wrote V Beniwal. "The economy's fastest expansion in more than two years in the June quarter was predicted accurately by only one of 44 economists surveyed by Bloomberg." Even as economists are trying to understand how the present data compare with the past the base year will be changed again to 2017-18. Household savings have dropped from 34% of GDP to 24% in 2017, non-performing assets in banks have risen sharply, infrastructure investments have been cut, manufacturing, especially in small and medium industries are growing at a meager 2-5%, the agricultural sector is suffering because of low prices and crude oil prices have risen from low levels, wrote Swamy. Swamy recommends that "the individual has to be persuaded by the government with incentives -- for example by abolishing the income tax" and "lowering the cost of capital via reducing the prime lending interest rates of banks to 9%, by shifting to a fixed exchange rate regime of Rs 50 to the dollar for the financial year 2019 and then gradually lowering the exchange rate for subsequent years". In a poor country like India abolishing income tax will result in an explosion of indignation because income tax is seen as progressive. People feel that it is only fair that the more you earn the higher should be your rate of tax, because the poor spend most of their income on essentials, such as food, and rent, while the rich spend a much smaller portion of their income on basics. The poorest 20% of the population in India spend 53.27% of their earnings on food and beverages, while the richest 20% spend only 11.88%. Conversely, the richest 20% spend 38.69% on housing, compared to a paltry 5.62% by the poorest 20%. If income tax is abolished the government has to increase indirect taxes which are based on consumption and hit the rich and poor equally. The share of indirect taxes is already considered too high in India. The Hong Kong dollar is linked to the US dollar and so the interest rate in Hong Kong varies according to rates set by the Federal Reserve in the US. No Indian politician will dream of giving up control on monetary policy. Dr Swamy is some kind of a genius with a PhD in Economics from Harvard, so why does he write such impossible things? Maybe, because he has a reputation of being a maverick and it is not easy to maintain such a reputation. He is wasting his genius.

Corruption of the political process is ultimately economic.

"Following Emmanuel Macron's election as President of France in 2017, global elites breathed a sigh of relief. The populist wave, they assured themselves, had crested," wrote Prof B Eichengreen. One view is that populism is a reaction to economic problems as in Italy, which has been suffering low productivity for more than two decades, or Brazil which saw a massive recession in 2015-16. But the US was growing for 6 years by the time Donald Trump was elected president, so economic problems are not to blame. Americans were angry at the transfer of jobs overseas due to outsourcing of production to countries with low labor costs. Those who are anti-Trump glibly blame the loss of jobs to automation. If factories in the US are twice as efficient and are manufacturing more because of automation, prices would fall, reducing imports. Instead US trade deficit with China is $375 billion, creating jobs in China at the cost of American workers. Analysis of numbers by some economists now suggests that the US government greatly overestimates productivity gains due to automation and the US has really lost jobs to China. It is not economics but, "What unites the supporters of these upstart politicians, therefore, must be something else. In fact, the main ingredient is revulsion against the political process," thinks Eichengreen. Perhaps, he has forgotten the devastating effects of the subprime crisis, following which corrupt bankers were bailed out while people lost their homes to foreclosure. The government distributed $439.6 billion to banks, auto companies and the insurance company AIG, to prevent them from collapsing. The government made a profit of $66.2 billion on the bailout but it did little to help homeowners despite Obama's rhetoric. Only a fraction of homeowners was helped to reduce their mortgage bill and one-third defaulted again. After her loss to Trump, Hillary Clinton said, "I win the coast. I win, you know, places like Illinois and Minnesota - places like that. What the map doesn't show you is that I won the places that represent two-thirds of America's gross domestic product. So I won the places that are optimistic, diverse, dynamic, moving forward." That is precisely why she lost. The financial centers on the east and west coasts are making money while the heartland of the US has seen a loss in living standards. "When a local factory closes because a firm has decided to outsource to a supplier across the border, more is lost than the hundreds (or thousands) of jobs that moved abroad," wrote Prof D Rodrik. "Anomie, family breakdown, opioid addiction, and other social ills often follow." This is something that both Eichengreen and Clinton have to understand. Till then they will have to tolerate the Donald's cherubic face. 

A weak state is better for growth and for citizens.

India has reduced the number of people in extreme poverty so that "Nigeria now houses 88 million extremely poor people compared with just 63 million in India, or 4.6% of the population. This means that by 2025 less than 0.5% of Indians will be extremely poor," wrote S Dhume. "This will dwindle to a mere 0.1% of the population by 2030." Paradoxically, economic growth has been strong under weak governments and not under strong ones. "For the first four decades of independence, single-party majority governments delivered anemic growth." "Between 1950 and 1980, India's economy expanded at an annualised average of of 3.6%. Per capita income grew at a sluggish 1.5% per year." After reforms in 1991 "per capita income has grown on average by 4.9%. Since 2004, it has grown even faster -- by 6.1% annually." So what about the present government? The BJP won absolute majority in the Lok Sabha with 282 seats out of a total of 545, which is now down to 269. So how has this government performed? Prime Minister Modi suddenly announced demonetisation of high value rupee notes on 8 November 2016, hoping that a large part of the notes would not be returned and the Reserve Bank would pay a huge dividend to the government for the reduction in its liabilities. More than 99% of notes have been returned. Farmers have not recovered from that shock as food prices continue to remain subdued. Tax inspectors have been given draconian powers, "On trade, tariff loving bureaucrats have prevailed over liberalisers. And while an elegant simplicity marks goods and services tax in most countries that have adopted it, in India it is a hot mess designed to to privilege discretion over clarity." India has a deep state "in the realm of economic policy", wrote RS Kapoor. "Unlike in a conventional sense, however, India's deep state is impersonal; it is not about a set of entrenched people but an institutionalised mindset which is innately anti-business." Controlling prices of drugs has restricted growth in pharmaceutical industry. The National Anti-Profiteering Authority has accused Hindustan Lever of making Rs 3.2 billion in excess profits by not transferring the benefits of GST to customers. The Minister of State for corporate affairs is to investigate 1,000 companies to see if they are spending on Corporate Social Responsibility. While forcing some sectors to reduce prices the government wants to increase the price of farm produce by increasing the Minimum Support Price and is uncomfortable with deep discounts offered by e-commerce companies, wrote A Ranade. Having surreptitiously passed the Aadhaar bill as part of the Money Bill, so as to avoid the Rajya Sabha where it does not have a majority, the government forced every citizen to provide fingerprints and iris scans making it the largest surveillance system in the history of the world. The Indian state is anti-people. Better for us if it is weak.

Should professors be preaching from old movies?

"Urban India is the site of the most dramatic changes in human life," wrote Prof S Srivastava. "The romanticised village of post-independence cinema holds little interest for young people in particular, as they seek new futures within possibilities offered by the inexorable expansion of urban agglomerations." This has resulted in uncontrolled migration into our cities, resulting in a quiet counter revolution as the middle class looks to protect its interests. "This new aspect of the urban can be most frequently witnessed in the manner in which Residents Welfare Associations (RWAs) are able to galvanise members to act on an issue that affects their perceived interests." "This is a new form of activism, enacted through lycra clad bicycle enthusiasts, leisure activists, environmentalists, bird watchers and 'ordinary mums and dads' who want a better life in the city'." Why is it alright for the rural poor to seek a better life in cities but so contemptible for the middle class? Although scornful of "post-independence cinema" Srivastava is repeating the sentiments of those iconic movies, such as Deewar, in which the baddie says he is incredibly wealthy with house, car, money, while the goodie glorifies his poverty by retorting that he has his mother, or the poor tramp in Awaara who wins the heart of a rich girl. While the rich are benefiting from the rapid growth of the Indian economy, the resulting pollution is affecting both rich and poor, wrote Prof R Prasad. The poor are benefiting more from economic growth, so that "44 Indians come out of extreme poverty every minute, one of the fastest rates of poverty reduction in the world". The rich have no option but to flee. "The destinations of choice are Goa, neighbouring hill stations, and of course, Western shores. Even if the rich are not migrating themselves, their children surely are." Others "are moving further into their air-purified spaces and their high-walled apartment complexes where the movement of people is controlled". Around 23,000 millionaires have left India since 2014. The rich are few while the poor are many, and increasing. "By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan," wrote E Ghani. Obviously, this growth in population is not because of the 263,000 dollar millionaires we have. Ghani's solution is jobs in the service sector. That is what is happening already with most recruitment in temporary jobs. Gig economy jobs are insecure with no safety nets, but "Heavy-handed regulation that puts gig workers fully on par with employees will be counterproductive, undercutting platform business models and leading to gigs drying up." Large numbers of poor suits politicians so that "the politics of welfare is inevitably reduced to a political competition for populist handouts and cash," wrote Y Aiyar. As long as professors are influenced by old movies politicians will oblige with handouts. After all, it is taxpayer money.

Humility, rather than "universal values" please.

Referring to the end of World War 1 on 7 November, 1918, exactly one hundred years ago, President Emmanuel Macron of France wrote, "It was the end of four long and terrible years of deadly fighting. The armistice, however, was not peace." Indeed it was not. The end of the war led to the Treaty of Versailles which demanded reparations of $33 billion from Germany in 1921, took away chunks of German territory and France even wanted to dismember Germany. "For five years the French and the Belgians tried to enforce the treaty quite rigorously, leading in 1922 to their occupation of the Ruhr." The huge reparations resulted in hyperinflation in Germany so that "By November 1923, the US dollar was worth 4,210,500,000,000 German Marks." This led to the rise of Adolf Hitler and an even more ferocious World War II, which killed 60 million people. Europe is no stranger to wars. Europeans have been fighting each other constantly for over 2 thousand years. The reason why the end of World War 1 is being celebrated is because it was the first time that technology, such as airplanes, tanks, submarines and chemicals, was used in a war with devastating effects. In a dig at President Donald Trump of the US, Macron writes, "The vision of France as a generous nation, of France as a project, of France as the bearer of universal values, was, in those dark hours, exactly the opposite of the selfishness of a people who look at their own interests. Nationalism is a betrayal of patriotism." Macron has conveniently forgotten France's history of colonialism or the statement by one Jules Ferry in 1884, "The higher races have a right over the lower races, they have a duty to civilize inferior races." Which led to the massacre of 45,000 Algerians demanding freedom from colonial rule. Not a very "bearer of universal values" is it? All these solemn ceremonies with red poppies and lofty speeches do not reveal the 85,000 Indian soldiers forcibly sent by the British as canon fodder while British soldiers hid behind. A total of 74.187 Indian soldiers died in a war that had nothing to do with us. Or the 50-100 million killed in famines because the British stole our grain to feed their soldiers abroad. Or the systematic loot of the Indian economy to the tune of trillions of dollars. The European Union was awarded the Nobel Peace Prize in 2012 for maintaining peace since 1945 but N Jones wrote that it was the military might of NATO which guaranteed peace. "I know that the old demons are resurfacing, ready to carry out their work of chaos and death," fears Macron. If that happens Europe will be responsible for unnecessarily imposing sanctions on Russia while sucking up to China which is much more belligerent and dangerous. Pious lectures do not make peace, humility does.

How will they get the money if they don't do it now?

Everybody is expecting a bad tempered meeting of the board of the Reserve Bank of India (RBI) on 19 November. "In case discussions between the government and the RBI break down, the government may choose to invoke Section 7 of the RBI Act and at least four of the 11 independent directors of the central bank could move a no-confidence motion against Acharya for publicly airing his views protesting government interference," said a person who wanted to remain anonymous. His crime? In a speech last month he warned against interfering with independence of the central bank, citing Argentina as an example where the previous president Cristina Fernandez used central bank reserves to prop up the peso. Argentina is having to borrow from the International Monetary Fund and one condition of the loan is independence of the central bank. The government wants to appropriate Rs 3.6 trillion from RBI reserves to be distributed as handouts to win general elections in May 2019. These reserves have been collected over decades and during tenure of many governments so there is no reason why this government should be allowed to loot the nation's wealth for its own purpose, wrote L Venkatesh. "Why then is the government insistent on going ahead with needling the central bank?" asked M Chakravarty. "The measures smack of desperation. The government seems to be really scared it will lose the general elections." The People's Bank of China is completely controlled by the government but that has not stopped foreign direct investments into the country. China is no comparison because it has a trade surplus of $442.4 billion last year whereas India is expected to have a current account deficit of over 2.8% of GDP this year. India has foreign exchange reserves of $394.5 billion while China has 10 times that amount at $3.12 trillion. If there is a run on the rupee, as happened in 2013, we are in a much better position to defend it because of adequate reserves. Both fiscal and current account deficits are increasing but retail inflation is low because of lower cost of food. Low food inflation may not be such a good thing because it translates to lower earnings for farmers. With more than 50% of the population dependent on agriculture for survival, angry farmers could mean a drubbing at the ballot box. Rising input costs and falling food prices have hit farmers particularly hard. Comparing the RBI with central banks of other nations is foolish because all of them have smaller populations, most of the countries are Western countries with freely traded currencies and countries, such as Russia, Turkey and South Africa, with weak economies. So why is the government playing with fire? Because, while Acharya is a professor at a university in New York where he can return, most politicians have no other outlets and the rewards of winning a election is to get your hands on taxpayer money. So, loot the RBI to loot the taxpayer later. Logical.

We do not care about Moody's. Or, do we?

"Almost a year ago, ratings company Moody's Investors Service Inc. upgraded India's sovereign rating, making India only the second large emerging market (among emerging markets in the G20 group of economies) to have improved its rating in the past five years," wrote T Kundu. Moody's mentioned three risks to India -- "increase in external vulnerability, a 'material deterioration' in fiscal metrics and  slide in banking health. All of these three risks materialized subsequently, in varying degrees". Since the upgrade, "India has witnessed the sharpest non-resident portfolio outflows (equities and debt combined) among major emerging market (EM) economies over the past year". Oil prices have gone up, the rupee has fallen, both current account and fiscal deficits are increasing, banks are still grappling with bad loans and non-banking finance companies have been hit recently due to the IL&FS scam. The only silver lining has been the recent fall in oil prices due to higher production of shale oil in the US and temporary waiver to eight countries from sanctions on Iranian oil. In response, Saudi Arabia, an implacable enemy of Iran, has announced a cut in oil production to support the price of crude. "The estimated number of persons employed during October 2018 at 397 million was 2.4% lower than the 407 million persons employed in October 2017," said a report by the Centre for Monitoring Indian Economy. It is not just that there are no jobs but whatever jobs are available are low paying, with low productivity. The introduction of the Goods and Services Tax has apparently created loads of temporary jobs in various industries because of formalization of the economy. These jobs are unstable and do not lead to increase in the standard of living because there is no prospect for the future. A senior manager at Tata Steel was shot dead a few days back by an employee sacked for indiscipline. The employee had been unable to find a job after his sacking. According to a report by HSBC, GST has failed to formalise the economy. But according to a politician of the BJP, GST has been highly successful because it has expanded the tax base. So, while people are looking for ways to survive politician are looking for their pound of flesh. Higher taxes are necessary to pay government employees who are the most pampered in the country. Retail inflation fell to 3.31% because of a fall in prices of vegetables, pulses and sugar. This despite higher oil prices, a weak monsoon and higher minimum support prices. Industrial production is erratic. Does it mean that consumer demand is falling off? No wonder Modi wants to loot Rs 3.6 trillion from Reserve Bank reserves to stimulate the economy with handouts. What will Moody's say about that?

Good we respect teachers. Maybe our children can learn.

Over 54% of Indian parents would encourage their children to become teachers, a study has found. Compared to 23% of British people and a low of 6% in Russia. 77% of Indians believe that pupils respect their teachers and awarded a rating of 7.11 to the education system. Which is puzzling because most studies show that children are learning very little in government schools and a lot attend school only to avail of the midday meal scheme. The 7th Pay Commission increased salaries for teachers so that a primary school teacher earns on average about Rs 200,000 per year, which is below the income tax threshold of Rs 250,000 per year. A lot of the time is spent on supervising midday meals which not only draw children to school but also ensure that children get balanced nutrition at least once a day. Even though various High Courts have opined that teachers should not be wasting their time in supervising meals the practice continues. Naturally, even poor parents prefer to send their children to private schools. Pandering to the vote bank the government passed the Right to Education Act in 2009 which forces private schools to reserve 25% of their intake for poor students. The Act stopped exams in schools so that children would not be failed. This meant that teachers had no incentive to teach as there was no way to judge how much children were learning. The alarming drop in standards has resulted in a return of exams for classes V-VIII from next year. The preference for private schools is so widespread that the government of Karnataka issued a letter to all government teachers to recruit more students to their schools or they would be assigned other duties. Parental earning has a big influence on how many children attend schools. While 78% of the poorest 20% of children attended primary school the number dropped sharply to 39% in secondary school and a non-existent 6% continued education after higher secondary. For the richest 20% of children, 89% attended primary school, 70% attended secondary school and only about 30% continued education after leaving school. Surprising, because we expect all children of richer parents to attend college. Sadly, 94% of engineering graduates are not fit for employment. No wonder candidates with college degrees applied for jobs as drivers for the Gujarat High Court. So why is there so much respect for teachers and our education system. Maybe because the enormous inequality of wealth is visible and the only way to get out of poverty is to have a good education. If some people have succeeded from this system maybe there is hope for others. Sadly, we are failing our children. 

It's all in the money.

"When politicians take up the cause of the people, industrialists complain they are becoming populists. They forget that it is a politicians duty in a democracy to represent the people," wrote A Maira. "Capitalist enterprises are designed to produce profits for their investors by improving efficiency and extracting economic surpluses from their operations." Maximizing 'shareholder value' was a good idea to instill discipline among CEOs of companies but today "it does more harm than good", wrote J Nocera. "It has widened income inequality." "It explains why so few companies subsidize the local symphony or art museum any more." "The dharma of institutions of democratic governance, on the other hand, is to ensure fairness in society and equity among stakeholders," wrote Maira. But Homo economicus is guided by a sense of fairness, wrote Prof R Hausmann. "We are the most cooperative species on earth because our feelings evolved to sustain cooperation, to put 'us' before 'me'. These feelings include guilt shame, outrage, empathy, sympathy, dread, disgust, and a whole cocktail of other sentiments." Technology is increasing inequality by replacing humans with machines so that the highly educated are accumulating more wealth while workers in traditional industries are seeing a fall in wages," wrote Prof K Basu. This has resulted in tribalism as people vote for populist politicians in anger. So will politicians be able to create a more equitable society? For the coming election in Chhattisgarh the Congress is promising to waive loans to farmers, increase minimum support price for grains, halve electricity bills, free healthcare, pensions to farmers and stipends to young people. At the same time it will ban alcohol in the state which will reduce revenue. Banks are staring at bad loans of up to Rs 1.74 trillion from electricity producers because distribution companies refuse to buy electricity at higher rates if they are prevented from charging customers. To resolve the crisis in the power industry the government devised a scheme, called UDAY, whereby state governments would take over 75% of the debts of power companies and finance it by issuing bonds. The Congress intends to make it worse. Ban on alcohol encourages smuggling and illicit brewing, which converts taxes into profits for criminals. Why is Congress resorting to promises which will destroy finances of the state? Because the BJP has managed to corner all the funds for elections. When money is coming from dubious sources you have sold yourself to them. How can politicians regulate their paymasters? 

We have a wealth of resources, we choose to buy from others.

"A second round of hikes in import duties was announced recently, this time on telecom equipment,"  wrote AA Rastogi. "This is a move to not only curb imports but also rein in a rising current account deficit (CAD), aiming to check the rupee's weakness against the dollar." However, "The hike in customs duties is seen as too little to trigger any reasonable correction in CAD." India is facing a higher current account deficit, because of higher oil prices and a falling rupee, and a higher fiscal deficit, because of off-budget promises of higher prices for farm produce, wrote A Ranade. Whereas the fiscal deficit is in rupees, which makes it easier to repay, the current account deficit is in dollars, which increases costs as the rupee falls against the dollar. An analysis showed that "India has among the highest effective average rates of tariffs across major trading economies of the world," wrote N Kwatra. "Among members of the BRICS grouping -- Brazil, Russia, India, China, South Africa -- India has the highest effective tariff rates on food items, automobiles and industrial inputs." Not only do tariffs make things more expensive for Indians to buy, they invite retaliation from trading partners. Worse, these increases in tariffs are hardly going to decrease our CAD because we import almost everything, wrote Jethmalani and Pengonda. We could take advantage of the trade war between the US and China by increasing our coal and agricultural exports to China, wrote Joshi and Tandon. Trouble is, that the government restricts exports of agricultural products to lower prices of food within the country. High food prices are deadly for elections. As for coal, "despite having the fifth largest coal reserves in the world, India is likely to import 164 million tonnes in the current calendar year as production inefficiencies and transport bottlenecks force companies to look overseas". The same is true of the oil and gas sector. Despite having huge untapped reserves the terms for exploration are so onerous that private companies are not interested, wrote Nichols and Tongia. With the government looking to switch the nation to electric vehicles our wealth will remain underground and we would have paid trillions of dollars buying oil from countries like Saudi Arabia. A former union minister once said that the oil import lobby threatened ministers with violence if there was any attempt to reduce imports. He later retracted his statement. We have signed Free Trade Agreements which encourage imports of iron, copper, aluminium and zinc, while our resources go unused. If we want to be poor who can stop us.