Where there are winners, there must be losers.

"For the first time, union government has imposed stock limits on traders across the country. To control rising onion prices, central government has banned export of onions with immediate effect." This is done to lower prices and keep consumers happy, but it is also a severe assault on farmers because they do not get a legitimate price for their crops. Onions and tomatoes are not insured against low prices through the Minimum Support Price (MSP), which is a government guarantee to buy 22 crops at a minimum price, including raw cotton, raw jute, copra and tobacco. Last year, MSP was extended to a group called minor forest produce (MFP). Artificially reducing prices of vegetables is so wrong because when there is a bumper crop prices crash below the total cost of seeds, fertilisers and pesticides, forcing farmers to dump their produce because they cannot recover the cost of transporting them to wholesale markets. This happens almost every year at different parts of the country. An analysis showed, "When wholesale prices are down, mark-ups are higher, and when wholesale prices are higher, mark-ups go down. This means that when farmers are getting lower prices, the benefits are not passed on to the consumers, whereas when prices go up, farmers are seen as the culprits, and attempts are made to bring down wholesale prices," wrote R Kishore. Not only does the government ban export when prices are high but it also "imports onions and 'dumps' at below import parity prices to 'tame' domestic inflation," wrote Prof Ashok Gulati. On visits to wholesale markets, Gulati found that "onion farmers get a mere 29 percent share of the consumer's rupee. The rest constitutes costs and margins of middlemen, with retailers apportioning the highest share". Farmers are forced to sell their produce to wholesale merchants at 585 government controlled Agricultural Produce Marketing Committees (APMCs), which are known as 'mandis'. "The APMC system was introduced to prevent distress sale by farmers to their creditors, to protect farmers from the exploitation of intermediaries and traders and to ensure better prices and timely payments of their produce through the auctions in the APMC area." But the effect has been the opposite. Mandis are controlled by several large traders and there is a complete mismatch in economic power between traders and farmers. Why not get rid of mandis and allow farmers to transport crops to parts of the country where prices are high? That will level prices and farmers will get what they deserve. Because state governments collect taxes on mandis and on the movement of farm produce across states. What is the point in taxing farmers to death and then handing out Rs 6,000 per year as dole? Because food and beverage prices constitute more than 50% of the consumer price index and the system gives politicians the power to suppress prices. Doling out taxpayer money earns the gratitude of poor farmers and buys their votes. Naked farmers are great for elections. Farmers and taxpayers lose, politicians win.

Furious indignation,but not righteous.

As was expected Pakistan Prime Minister Imran Khan vented fury on India at the UN General Assembly. "Terrorism has nothing to do with any religion," Khan said. "No one did any research that before 9-11, the majority of suicide bombers in the world were Tamil Tigers. They were Hindus." "No one blamed Hinduism. And quite rightly. What does Hinduism got to do with what desperate people were doing in Sri Lanka." Spot on. We are not blaming religion, we are blaming Pakistan. "Fielding a junior diplomat in its right of reply to Pakistan Prime Minister Imran Khan's address to the United Nations, India mocked his angry presentation before the General Assembly on Friday as 'hate speech' coming from a 'medieval mindset' from a country that has 'monopolised the entire value chain of the industry of terrorism"."  Giving a list of Pakistan's support of terror groups, India's first secretary Vidisha Maitra asked why its minority community has shrunk from "23% in 1947 to 3% today" due to "draconian blasphemy laws, systemic persecution, blatant abuse and forced conversions". Ouch. Actually Imran Khan should thank India for diverting people's attention from the economy. Pakistan's foreign exchange reserves are just enough to cover two months of imports, "its budget deficit (at 8.9% of GDP) is the highest in about 20 years, its liabilities (at over Pakistan Rs 40 trillion) exceed the size of its economy" and the rupee has lost a third of its value against the US dollar. It is surviving on $6 billion loan from the IMF (the 13th in 30 years) and loans from China, Saudi Arabia and the UAE. Apparently, "Firecrackers were burst and slogans shouted in Srinagar, the main city in Indian-administered Kashmir, immediately after Pakistan Prime Minister Imran Khan ended his belligerent speech." In addition to all the loans that he has taken, Imran had to travel on a plane borrowed from the Crown Prince of Saudi Arabia. Unfortunately he had to return by commercial flight because the Saudi aircraft developed a fault. Who paid for his ticket? "Indian Kashmir is a state that receives much greater central government  aid per capita than any other state in the country," wrote Carl Clemens. In Balochistan, on the other hand, "the local population is kept impoverished and uneducated, and the youth routinely culled. This is exactly what Pakistan did in Bangladesh in 1971". After the massacre of children of army officers in a school in Peshawar in 2014 the army killed thousands of suspected militants and hundreds have been hanged after brief trials. Pakistan has ethnically cleansed the part of Kashmir it occupies and even handed over 5,180 sq km of Gilgit-Baltistan to China in 1963. A US official asked why Imran is silent about the 1 million Uyghurs, "Muslims who are being detained in Western China, literally in concentration-like conditions". With Article 370 gone Kashmir becomes a part of India and Pakistan cannot lay claim to it. That takes away the army's special position in Pakistan. That is why they are frothing at the mouth.

The perks of power in India.

"The Unnao rape survivor was discharged on Wednesday from the AIIMS (All India Institute of Medical Sciences) where she was admitted after she met with an accident, sources said." She is said to have been kidnapped in 2017 and raped by Kuldeep Singh Sengar, a 4 time member of the legislative assembly in Uttar Pradesh (UP) and belonged to the BJP. He has since been expelled from the BJP. Earlier he had been expelled from the Congress, the BSP and the SP. A First Information Report (FIR) was filed with the police who arrested the father of the victim. He was assaulted by Sengar's men, possibly for having the temerity of filing a police complaint, and died of his injuries in prison. It was only when the woman tried to immolate herself in front of the residence of the Chief Minister of UP that the media got alerted about the events and Sengar was arrested in response to the nationwide outrage that followed. Even better was to follow. In July, "A car in which the survivor of Unnao rape case, her family and lawyer were travelling was hit by a an over-speeding truck in Rae Bareli on Sunday, killing two members while leaving her and the advocate critically injured, police said." A 12-member team from the Central Bureau of Investigation (CBI) found that the truck was on the wrong side of the road and the car hit it from behind. If the truck was on the wrong side of the road it was obviously going in the opposite direction and so the car could not possibly hit it from behind. However, now the CBI has decided that the woman and her family are facing "the highest level of threat". In another case a 23 year-old law student accused Swami Chinmayanand of raping her for over a year. Swami Chinmayanand was born Krishna Pal Singh and was elected to the Lok Sabha from UP and was a minister in the previous BJP government in 1999. The change is name is to show that he had become a religious man. In Sengar's case the father was arrested by the police after being beaten up, while in this case the woman herself and three of her friends have been arrested on a charge of trying to extort money from Chinmayanand on false charges. She was arrested so quickly that her lawyer had no time to appeal for bail which will be heard on 30 September. Earlier this year a 35-year old married woman accused the Chief Justice of the Supreme Court (CJI) Ranjan Gogoi of inappropriate sexual behavior. The CJI refused to recuse himself from the case and set up an in-house committee to investigate the charges. Naturally, the woman refused to have anything to do with the committee and the case fizzled out. In Goa, a member of the Congress accused of raping a minor joined the BJP and was rewarded when his wife was made a minister. "Although India accounted for 18% of the global population in 2016, a study published in the Lancet Public Health journal showed that Indians accounted for 37% of the global suicide deaths among women." Are these events related?

Options get limited when so many Indians are cheats.

"On 20 September, finance minister Nirmala Sitharaman announced that the government had decided to cut the corporate tax to 22% (effective rate of 25.17% including cess and surcharge) for existing firms and to 15% (effective rate 17.01%) for new domestic firms in the manufacturing sector," wrote V Kaul. "The government said this was being done to promote growth and investment." Tax cuts will certainly increase net profits of firms by the amount equaling the reduction in tax but how will it increase cash flow, which reflects true earnings of a company, or of EBITDA, which is earning before interest, tax, depreciation and amortization. Because they depend on total sales and, "India is currently going through a major collapse in consumer demand." Tax cuts will definitely increase earnings per share but whether they stimulate growth depends on how companies use the money, wrote H Jethmalani. "Some options are: De-leveraging of balance sheets, price cuts/ higher promotions to spur demand, higher payouts to shareholders through dividends and higher capex spending." Many companies are sitting on excess capacity and so will wait for demand to improve. Those companies that avail of the lower tax rate have to give up all of their exemptions and incentives, which allowed them to carry their losses forward for 8 years, and once they do that they cannot return back to the old system. Share prices soared on the announcement but it is unlikely to lead to a revival of "animal spirits" unless the broader economy improves. Very few Indians invest in stocks, either directly by buying shares of individual companies, or indirectly through mutual funds. Indian stocks are very expensive already. "On a one-year forward price-to-earnings basis, the MSCI India index is currently trading at 18 times" which is "higher than the MSCI Asia Ex Japan's multiple of 13 times". The tax cut was touted as a Rs 1.45 trillion stimulus for the economy but "Crisil believes that the top 1,000 firms will see savings of Rs 37,000." "To earn Sitharaman's tax benefit , companies must give up their current tax exemptions and other fiscal incentives -- freebies that are estimated to account for over Rs 1 trillion," wrote O Goswami. So the net stimulus is Rs 0.45 trillion or 0.2% of GDP. Since inflation is low the interest rate needs to be cut as well, wrote Iyer and Jethmalani. However, if the government is forced to borrow more it will raise bond yields and keep lending rates high. A cut in personal income tax will certainly increase spending and lead to higher demand. Politicians are convinced that there are millions of very rich Indians who are cheating on income tax so they do not want to be seen to be lenient. That limits their options.

A different kind of phone banking.

Nationalization of banks in India "in 1969 and again in 1980 achieved a larger public purpose", wrote MS Sriram, which was to provide "credit to the poor and for public investments required to boost economic development". To Sriram, public sector banks (PSBs) are better because "they have a better impact on priority sector lending achievement, and paid higher wages", whereas "private sector banks score better on efficiency and profitability parameters -- they have better return on assets, return on equity, net interest margin and a higher proportion of low-cost deposits". With the government in control, "It did not really matter if these institutions made losses. They would be recapitalized once in a while to keep them going." Therein lies the problem. Losses in depositors' money replaced with taxpayer money. Prime Minister Narendra Modi accused the Congress of "underground loot of banks" which led to bad loans, or non-performing assets (NPAs), in excess of Rs 9 trillion at PSBs. "The story of NPAs began in 2008. Before the 2009 elections Congress felt that there was a year to go so it opted to empty as many banks as possible," Modi said. Ministers would phone bank managers to lend money to their cronies or pet projects. "It was the result of this practice of telephone banking that loan flow shot up so much. Loans were handed out to their favorites." "When it was time to repay, a fresh loan was given. This cycle continued and the country and its banks were trapped in a web of NPAs." When politicians indulge in misusing public deposits, managers of PSBs also gave out loans in return for favors.This was the murky world of 'suitcase banking', wrote T Bandyopadhyay. This government seems to be copying the Congress by asking "state-run banks to hold open houses in 400 districts of the country, tasking them to extend credit to five new customers for every existing borrower". The Finance Minister also asked PSBs to loan money to "retail borrowers, including homebuyers and farmers", in a replay of the infamous 'loan melas' during the Congress era. The Finance Minister has decided to merge 10 PSBs into 4 big banks hoping that increased size will help in higher lending. In 2015, a 57 page report of Credit Suisse gave a detailed account of the formidable debts accumulated by a dozen big Indian companies," wrote C Jaffrelot. Despite this, "companies facing heavy debts continued to borrow from the banking system. The Adani group's debt, for instance, increased by 16 percent in 2015." Why? Because, political parties spent a total of $7.2 billion in this year's general elections and business leaders donated huge sums through anonymous election bonds. With retail loans showing signs of stress the BJP could be going the same way as the Congress. As long as banks are controlled by the government the temptation to spend for electoral gain will remain irresistible. That is why they will never give up control. And the crisis will continue.

Why did he cut the branch he was sitting on?

In a unanimous decision by all 11 judges, the UK Supreme Court ruled yesterday that Boris Johnson acted improperly when he advised the Queen to prorogue parliament. "The decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification," said Supreme Court president Lady Hale. Parliament was suspended on 9 September and was due to reopen on 14 October. Prime Minister Boris Johnson was accused of lying to the Queen to get her assent. Johnson is cutting short his visit to the United Nations in New York to fly back to the UK but speaking to journalists he was defiant.  "We in the UK will not be deterred from getting on with delivering on the will of the British people to come out of the EU on 31 October," he said. Earlier the highest civil court in Scotland ruled against Johnson saying, "This was an egregious case of a clear failure to comply with generally accepted standards of public behaviour of authorities." But the High Court in England and Wales found that Johnson had acted lawfully. The Supreme Court has settled that argument even though the government argued that the court should not interfere in the business of parliament. The court opined that it was stopping the executive from abusing its power to stop parliament from exercising its duty to question the government. After parliament voted to stop a no-deal Brexit and ordered the Prime Minister to seek a 3-month extension till the end of January 2020, Johnson said that he would rather be "dead in a ditch" than ask for an extension. That is the trouble with Johnson. He has adopted an aggressive attitude both against the European Union (EU) and the opposition in the House of Commons since the beginning, promising to leave the EU with or without a deal. He threatened EU negotiators with a no-deal Brexit if they did not surrender on the Irish backstop. The Irish backstop is a continuation of the customs union between the UK and the EU to avoid a hard border between Northern Ireland, a part of the UK, and the Republic of Ireland, a member of the Euro area. It is hated by Brexiteers because they see it as remaining a part of the EU, as the UK would still have to comply with EU trade rules. European Commission President Jean-Claude Juncker said that the backstop could be replaced if an alternative solution is proposed by the British government. However, Johnson has not provided any alternative, accusing the EU of being intransigent. Can Johnson defy parliament and refuse to ask for an extension and let Britain fall out of the EU without a deal on 31 October? He would then be in contempt of parliament and that would surely put an end to his political career. Johnson has US President Donald Trump's support but he cannot veto bills as Trump can. He has reduced his party number by expelling members who voted against him. He has cut the branch he was sitting on.

Cars or carts, politicians must decide.

"Sales of cars and SUVs in India declined for a 10th month in August, as the worst slump in almost two decades for the country's auto sector shows no sign of letting up. Deliveries fell 41% from a year earlier to 115,057 units according to data released by the Society of Indian Automobile Manufacturers (SIAM) on Monday. Truck and bus sales dropped 39%. Two wheeler sales -- a key indicator of demand in rural India -- fell 22% to 1.5 million units." The capital city Delhi has the largest number of vehicles in India at 10.9 million, and even here the number of vehicle registrations "declined in the first eight months of 2019, the first drop for the period for six years". "Auto executives have been demanding tax cuts and easier access to financing for manufacturers, sellers and consumers." The government responded by postponing hike in car registration fees and easier financing but it is unlikely to have much effect. When sales of Maruti Suzuki, which had 54% of the market share in November 2018, drops to 49.83% in April-August period of this year then it must be serious. Economies of entire regions dependent on Maruti are suffering as jobs are lost or working days reduced. Automobile parts industry, "largely deregualted" with import tariffs of 12.5%, has "higher productivity and much better export performance than the completely built units sector" which are protected by import tariffs "that are anywhere from 60% to as high as 125% in some cases", wrote Prof V Dahejia and R Subramania. Instead of protecting manufacturers of cars they should be subjected to 'Schumpeterian creative destruction' through open competition. "India's automobile industry accounts for 49% of the country's manufacturing GDP, and it directly or indirectly employs 37 million workers," wroteS Vishwanathan. "The auto sector contributes roughly 15% to GST collection." A huge proportion considering that, "In India, 22 people out of a thousand own car, while in the US and UK, 980 and 850 per 1,000 individuals have car respectively, NITI Aayog chief executive Amitabh Kant said." Import tariffs are kept high so that the government can squeeze as much money out of car owners, who at 0.022% of the population constitute an insignificant number of voters. Petrol is taxed at 94.97%, earning over Rs 11 trillion in 4.5 years for the government. Registration charge for new cars was increased from Rs 600 to Rs 5,000, an increase of 833%. Fines for traffic violations were increased by 90 to 500% recently. The driver and owner of a truck were fined Rs 200,000 in Delhi under the new rules. No truck driver earns enough in an entire year to pay even a fraction of the amount. The Prime Minister's home state of Gujarat slashed rates of fines by up to 90%. Delhi Chief Minister announced restriction of cars from 4 to 15 November to reduce pollution. Cheap publicity. Indian politicians have to decide whether they want a car industry or we should go back to bullock carts. None of these rules apply to politicians. 

India is Congress-free. BJP is the new avatar.

In a surprise move that sent corporate India into a frenzy the Finance Minister cut corporate tax rate from 30% to 22%, which will take the effective tax rate to 25.17%, after addition of surcharge and cess. This will be effective from the start of the financial year on 1 April. The effective corporate tax rate was 23.22% in 2013-14, under the previous Congress led government, so this was just a reversal of what the Modi government has done. Ecstatic titans of business described the announcement as a "bold, brilliant bazooka" which will blow up "animal spirits" and revive the economy. Though the cut is expected to reduce tax collection by Rs 1.45 trillion and raise fiscal deficit to 4%, from 3.3% promised in the budget, it will be made up by higher taxes generated by higher earnings, hoped the Finance Minister. Tracking "seven high-frequency indicators across 10 large emerging markets" the Mint found that "India's metrics have deteriorated considerably and in August India found itself in the bottom half of the heap behind Russia, Malaysia, Indonesia, and China". In addition, "To boost liquidity in the economy, Finance Minister Nirmala Sitharaman today said public sector banks will organise credit "Shamiana meetings" in 400 districts beginning October 3 to provide loans to NBFCs and retail borrowers, including homebuyers and farmers." NBFCs are non-banking finance companies, India's shadow banks,  which are experiencing serious shortage of liquidity ever since, "The collapse of the highly rated infrastructure operator-financier IL&FS group exposed the fault lines under Indian shadow banks' inpressive credit edifice," wrote Andy Mukherjee. Sitharaman also said, "Government also wants banks to recast MSME (micro, small and medium enterprises) loans instead of declaring it a NPA (non-performing asset)." This has been copied from Janardhan Poojary who was a minister under Indira Gandhi and Rajiv Gandhi. "Retired bankers, still bitter about Poojary, recall how as a junior finance minister, he and his men, forced them to squander money in loan melas of the early '80s to anyone who flashed a ration card." "It was the late-70s and early-80s when the culture of non-repayment of loans spread." "RBI old-timers say that Manmohan Singh, the RBI governor then, soffed at the melas", who as the prime minister urged "state-run banks to dole out up to Rs 10,000 in unsecured loans to landless laborers to boost consumption in rural areas" which reminded bankers of 'loan melas' of the 80s. Banks were also told to "accelerate distribution of Kisan Credit Cards to farmers". Total outstanding agricultural loans stood at Rs 12.6 trillion on 30 September 2016. Banks have NPAs of Rs 9.27 trillion of loans to companies which they try to recover by selling assets under the new Bankruptcy Act. They cannot touch farmers or laborers. BJP is the new Congress. India is Congress-free as Modi promised.

A currency is only as strong as the central bank which issues it.

"William Dudley, the immediate past president of the Federal Reserve bank of New York, recently stirred up a hornet's nest when he called for the Fed to consider the impact of its policies on the 2020 presidential election," wrote Prof B Eichengreen. Like the Reserve Bank of India (RBI), the Federal Reserve is the central bank of the US, but unlike the only RBI, it has 12 branches, each of which has its own board and president. US President Donald Trump has been demanding deep cuts in interest rate and reacted furiously after the Fed cut its Funds rate by 25 basis points, calling the members of the Federal Open Market Committee (FOMC), which sets the funds rate, "boneheads". Dudley reasoned that, "If the Fed cuts interest rates in response to Donald Trump's trade-policy actions, the president may be encouraged to resort to more of the same." The Fed can "warn of collateral damage of low interest rates, which harm Americans living on fixed incomes and raise financial stability risks by encouraging investors to stretch for yields". No such problem in India. The government appointed a retired IAS officer, with a degree in history, as governor of the RBI, who has cut interest rate by 110 basis points already and is threatening to take an axe to the interest rate again.  He also cheerfully doled out Rs 1.76 trillion ($24.4 billion) to the Central government from the RBI reserves. The Fed is injecting $75 billion into banks to soften overnight lending rates. The Finance Minister asked for deeper rates cuts to stimulate the economy. The government is by far the biggest borrower and is set to borrow over Rs 7 trillion in this financial year, an increase of 10.9% over 2018-19. Low interest rate helps the government to reduce the interest it pays on its borrowings while reducing the interest people earn on their savings. It is thus a tax on savers. Since the government borrows such huge amounts it creates a shortage of money in banks and results in higher lending rates. To prevent that, the government proposed borrowing overseas in foreign currencies to plug the shortfall in its revenues. Why so frantic? Is India in recession? India's economy grew by 5% in the April to June quarter, while the US economy grew by 2.0%, down from 3.1% in the previous quarter. The US is engaged in a trade war with China which is expected to be a huge bonanza for India as industries shift their production out of China and China looks for alternatives to US agricultural products. Trump wants to weaken the dollar which has remained strong despite these problems, hurting US exports, whereas the rupee has been falling against the dollar. While a weaker rupee could help exports, a strong dollar is not necessarily good news. The Federal Reserve protects US interests, our RBI protects the government. The dollar is strong because the Fed is strong. The rupee can only get weaker.

'But' is a most unsatisfying word.

Euphoria! The Bombay Stock Exchange (BSE) index the Sensex soared by 2,102.40 points yesterday, adding Rs 2.11 trillion to market capitalisation of listed companies. The market eventually closed at 38,014.62, a gain of 1,921.15 points or 5.32%. What set the Sensex on fire? "Manufacturing companies not availing of tax sops can now opt for a 22% corporate tax rate, while new manufacturing companies that register and start production between 1 October and March 2023 can avail an even lower tax rate of 15%." Corporate tax rate varied from 30% for domestic to 40% for foreign companies with added surcharge and cess that would add anything up to 20% of the tax, so the effective rate of tax will fall from around 35% to around 25%. The Prime Minister Narendra Modi flew off to the US to attend a 'Howdy Modi' event in Texas, organised by Indian expats living in the US, and this announcement and the stock market reaction makes for a nice speech at the event. Amid all the high fives there is a 'but', actually several 'buts'. The cut in taxes will create a shortfall in the budget of Rs 1.45 trillion which has to be filled by increased borrowing. Yields on 10-year benchmark government bonds "which was last traded at 6.64%, shot up over 20 basis points before closing at 6.79%". "The biggest fear among bond dealers is that the government will borrow more to make up for its revenue shortfall and increase supply of bonds." "Economists expect that the fiscal deficit could expand to between 3.8% and 4.1% of the gross domestic product (GDP)." That will put upward pressure on interest rates. Then there is a question of trust. Just a couple of months back there was a massive increase in surcharge on people earning more than Rs 20 million per year which would include almost all foreign expats working in India. Last year, rules for e-commerce companies, such as Amazon and Flipkart, were changed suddenly. This was just a few months after Walmart paid $16 billion to acquire Flipkart and agreed to pay Rs 100 billion in tax on the deal. This is probably a typical Indian phenomenon wherein the buyer pays tax which should be paid by the seller who, after all, is making a profit. Needless to say, both Walmart and Amazon were not best pleased. The reduction in corporate taxes is apparently going to make companies more competitive globally and increase exports to over $1 trillion. How exactly? Corporate taxes are paid on profits which come from sales which come from consumer demand which has slumped, especially in rural areas. Export competitiveness depends on prices of goods and services which are taxed under the Goods and Services Act (GST). Finally, factors of production, such as labor and land, remain as difficult as before. Perhaps, the best reform would be to stop changing rules and setting targets on tax officials which leads to tax terrorism. People can then plan long term.     

If it wins elections it must be good.

"Any student who has endured even an introductory course in macroeconomics would remember the Philips curve that argues that inflation and growth move together in the same direction," wrote A Barua. Inflation peaked at 11.5% between 2011 and 2013 which is why the government formed a Monetary Policy Committee (MPC) at the Reserve Bank of India which was set a target of 4% plus/minus 2% for consumer price inflation (CPI). Barua blames the RBI "about the inflation paranoia that followed", which apparently resulted in lower growth because wage inflation fell, tax collections, dependent on nominal gdp, also fell and consumer spending fell because of 'poorness illusion'. Inflation is definitely good for the government because it collects more taxes as wages rise and value of its debt falls as the value of money falls. So if inflation is good should we aim for the highest level possible? The inflation rate in Venezuela has reached 10 million percent which should have made it the richest country in the world, but its people are starving. "Most central banks favor an inflation target that is in the region of 2 to 2.5%." "Some economists argue there should be a higher target in times of recession, such as 3%." It is not that rising prices lead to higher growth of the economy but that higher growth leads to inflation because supplies take time to catch up with demand. As for taxes, the government has earned in excess of Rs 11 trillion from taxes on fuel as the international price of crude oil has remained low since 2014. This year's budget further increased excise duty and cess on fuel. If the oil bonanza had been used to refinance banks, which are still holding bad loans of over Rs 9 trillion, it would have increased lending, regardless of the rate of interest. The problems of the economy are self-inflicted, wrote Puja Mehra. The informal economy, which employs over 80% of workers, has not recovered from demonetization in 2016. Small businesses are unable to comply with an excessively complicated goods and services tax (GST). Consumption has fallen so much that growth in fast moving consumer goods (FMCG), which are articles of daily use, has also slowed. "Between 2011-12 and 2017-18, earnings of regular workers declined in both rural and urban areas. Rural regular wages declined by 0.3% per annum, while urban regular wages declined by 1.7%," wrote Prof Himanshu. Restrictive policies on agriculture, to keep food prices under control, have acted as 'implicit taxation' on farmers, wrote Prof A Gulati. "If one calculates the sum involved in this 'implicit taxation', it amounts to Rs 2.65 trillion (lakh crore per annum, at 2017-18 prices, for 2000-01 to 2016-17. Cumulatively for 17 years, this comes to roughly Rs 45 trillion at 2017-18 prices." "Given the fact that the poor spend a much larger portion of their incomes on food, they are extremely vulnerable to food inflation," wrote R Kishore. That is why they are not much affected by falling GDP growth. Which is why Modi won re-election with a huge majority. That, after all, is what matters.

Why the need to escape?

"The Supreme Court Wednesday pulled up the Centre on the number of deaths of manual scavengers and for not providing them with protective gear, PTI reported. The top court said over 70 years have passed since India's independence but caste discrimination persists." While all of us share in the court's anguish it is not possible to understand the reasoning. What protective gear? Will gas masks suffice or will these people need air cylinders to breathe and if so will there be room to work inside cramped spaces? And what has it got to do with caste? It is true that upper caste people will not touch waste but surely no one is forcing lower caste people to do such work. It is not as if they are put in chain gangs and forced down into sewers. "In no country, people are sent to gas chambers to die. Every month four to five persons are losing their lives in manual scavenging," the court said. Is it alright if they go to Italy to die in gas chamber? "Four Sikh men from Punjab have drowned in a slurry tank on a dairy farm near Pavia in northern Italy. Investigators suspect that the four were overcome by carbon dioxide fumes from the cow manure." The real question is what drives people to do this kind of work? The answer has to be poverty, lack of education and lack of jobs. According to a United Nations (UN) multidimensional poverty index, India lifted 271 million people out of poverty between 2006 and 2016 based on "assets, cooking fuel, sanitation and nutrition". The bad news is that 369 million still remain in extreme poverty. This is despite numerous social schemes launched over the years by previous governments and added to by the present government of Prime Minister Narendra Modi. "India was the leading country of origin of international migrants in 2019 with a 17.5 million strong diaspora, according to new estimates released by the United Nations." On top of that there has been a 996% rise in the number of Indians seeking "political asylum in other countries on the grounds that they feel fearful to continue living in the country". We may dismiss those seeking asylum in the US, Australia or Europe as economic migrants pretending to be victimized but shockingly Indians have applied for asylum in Yemen, Sudan, Burundi and Bosnia among 57 countries. Everyone knows of the civil war and famine in Yemen. After months of protests over the state of the economy in Sudan, which resulted in several deaths, its military rulers agreed a power sharing deal with the civilian opposition. President Pierre Nkurunziza has unleashed a wave of violence with "summary executions, rapes, abductions, beatings, and intimidation of suspected political opponents" in Burundi. Is India more threatening than these countries so that people feel the need to escape anywhere? What about us who remain?

Twin recipe for twin deficit and twin balance sheet problems.

India's stock market index the Sensex fell over 700 points at one point yesterday and closed down 642 points at 36,481. Why? Because of attacks on Saudi Arabia's oil processing plant at Abqaiq and the Khurais oilfield. "Brent crude futures, the international benchmark, rose as much as 19.5% to $71.95 per barrel at the open, the biggest jump on record." India imports over 80% of its oil so any increase in prices hurts the economy. "Every dollar increase in the price of oil raises the import bill by Rs 10,700 crore (Rs 107 billion) on an annualized basis. India spent $111.9 billion on oil imports in 2018-19." "According to Nomura estimates, every $10/bbl rise in oil price would reduce gross domestic product (GDP) growth by about 0.2 percentage points, widen the current account deficit by 0.4 percent of GDP, widen the fiscal deficit by 0.1 percent of GDP and add around 30 basis points (bp) to headline CPI inflation." If the rupee depreciates against the dollar, then for every 5% drop the "headline inflation will increase by 20 bp". Given this background, T Kundu asked, "Is India ready for a global shock?" The Indian economy is in a much stronger position than in 2013 when the rupee dropped to 69 to the dollar on talk of reducing quantitative easing by the Federal Reserve in the US -- the famous 'taper tantrum'. There are other problems. Excessive bank lending after the 2008 crisis has resulted in companies saddled with enormous debt, which they cannot repay, which means banks are struggling to clear their books of bad loans amounting to nearly 10% of total loans. This is the 'twin balance sheet problem'. On the other hand, "Households' financial savings currently account for 11% of GDP, the lion's share of which is already being gobbled up by by the public sector (including state and central governments, and CPSEs) ." CPSEs are central public sector enterprises. If savings rate continues to decline and cost of imports rises, "The twin deficit (fiscal and current account deficit) problem which India tamed successfully after 2013 mini-crisis, may be back in play." Former Vice Chairman of NITI Aayog Prof A Panagariya has a "Recipe for Recovery". He rubbishes claims that the auto industry contributes 50% of manufacturing and is about to lose 3,50,000 jobs. S Viswanathan wrote a robust defence of the auto industry, pointing out that vehicles attract tax at rates of 28-50%, while margins for manufacturers are less than 10%. Tax on self-charging hybrid cars range from 28 to 43%. Panagariya recommends to "let the rupee depreciate" and to allow inflation to rise to 5-6%. "Food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.6%." Higher costs for these is a sure way to lose elections. Commercial borrowings account for 38% of India's total external debt of $543 billion. A weaker rupee will only increase the total and may lead to default. Panagariya's recipe is most likely to cause severe indigestion for our politicians. Keep our fingers crossed and hope for the best. 

Are the Americans really so stupid?

Earlier this month US President Donald Trump canceled a secret meeting with the Taliban and Afghan President Ashraf Ghani at Camp David. This was after the Taliban boasted about killing a US soldier  by a car bomb "at a checkpoint near NATO headquarters and the US embassy in Kabul". This came apparently when a deal "in principle" had been reached between the US and the Taliban which would have seen the US withdrawing troops "from five bases across Afghanistan within 135 days so long as the Taliban meet conditions set in the agreement". Another US service member was killed yesterday. A Taliban delegation visited Russia after the talks were called off where they expressed their desire for a resumption of dialogue. "It was astonishing for us because we had already concluded the peace agreement with the American negotiating team," said Taliban spokesman Shaheen. It would have been more than surprise, more bitter disappointment because the US had accepted almost all the Taliban conditions. The elected government in Kabul was excluded from the talks because the Taliban regards it as a puppet of the US and the Taliban gave "no assurances of mending its ways, sharing power, or even ceasing to harbor terrorists", wrote Ashok Malik. "On their part, the military, and the department of defence have been doing their utmost to oppose delay and sabotage their president." Why? Because, "The military is clear that once it goes it can never come back. It will have to destroy or write-off billions of dollars worth of equipment in Afghanistan, carefully put in place over 18 years." "The US negotiator was Pashtun-origin diplomat Zalmay Khalilzad," wrote S Deb. Pashtuns are natives of Afghanistan so Khalilzad should be keen to bring peace to Afghanistan but while he traveled the world he spoke only twice to India which "has spent over $3 billion on projects in Afghanistan, including building its parliament, a dam, highways and transmission lines". India, naturally, is greatly relieved that the talks have been called off, wrote Indrani Bagchi. A Taliban government in Kabul would have stopped trade with India and would have also blocked trade with Central Asian countries through Chabahar port in Iran, and then on through Afghanistan. It would have given a great boost to Pakistan as controller of the Taliban and allowed it to send more terrorists into India. What is really astonishing is that the US, despite having some of the best universities in the world, refuses to learn from its own history. Ronald Reagan supplied arms and trained the Mujahideen in "bomb-making, sabotage and urban guerrilla warfare". Just as Trump invited the Taliban to Camp David, so Reagan invited the Mujahideen to the White House. Mujahideen, Taliban, al Qaeda and the 9/11 attacks have one common connection and that is Pakistan. No point in ceremonies at Ground Zero it they continue to reward the perpetrators. How stupid?

If we don't want wealth, others will.

Ever since growth in the gross domestic product (GDP) came in at 5% in the June quarter there has been a spate of articles analysing reasons for the slowdown and suggesting ways to kick-start the economy. A growth of 5% is still growth but "The five straight quarters of slowing growth mark the longest slump since 2012," which maybe described as a quasi-recession, according to economist Teresa John. According to the previous Chief Economic Adviser Arvind Subramanian our GDP growth is overestimated by 2.5%, which means actual growth could be just 2.5%. No one wants to think of that, probably for fear of spooking the markets. The main reason for the slowdown is a slump in investment. "Indian companies, across both private and public sectors, announced new projects worth Rs 43,400 crore in the June 2019 quarter, 81% lower than what was announced in the March quarter and 87% lower than the same period a year ago," wrote S Alexander. Companies are not only refraining from investing in new projects, old projects have stalled for lack of funds. "Implementation of investment projects worth Rs 13 trillion has also been stalled." The Economic Survey of 2016-17 suggested that corporations overborrowed from 2003-2012 and are now unable to repay their debts, "while those that remain sound can't invest either because fragile banks are not in a position to lend to them", wrote V Kaul. However, debt-to-equity ratio and interest coverage ratio suggest that most Indian companies are not overleveraged. The real reason is that, "Tax rates are not only high, but also change every few months," wrote C Bhagat. Businesses are seen as mafia enterprises and rich people as bad people. "So, super rich people are super bad." Every effort is made to tax them out of existence. Regulations in India are too repressive. "It is exhausting for businesses and individuals to navigate the regulatory gauntlet because of overreach by enforcing agencies, and it is often manifest in the execution of direct and indirect tax laws. This is what has come to be know as 'tax terrorism'," wrote R Jayaswal. "The Prime Minister and the government tend to conflate informality with corruption, and, in a misplaced effort to eliminate corruption, could end up killing the informal economy," wrote Prof S Rajagopalan. The Goods and Services Tax (GST) is too complex to comply with. "Tax commissioners have wide powers to arrest people without registering an FIR (first information report) or police complaint, and businessmen are left without the option of anticipatory bail." China opened up its economy to foreign investment while India resorted to import substitution by protecting local industries with high taxes on imports which is why China became rich and we didn't, wrote V Kaul. "The trouble is that in the last two years, the government has been encouraging protectionism and import substitution all over again." No wonder terrified wealthy people are procuring passports of other countries. They will take their wealth with them.

Not a proxy war, more proxy bragging.

"Yemen's Iran-aligned Houthi group said it attacked two plants at the heart of Saudi Arabia's oil industry on Saturday, knocking out half the Kingdom's output, in a move expected to send oil prices soaring and increase tensions in the Middle East." "The attacks will cut the Kingdom's output by 5.7 million barrels per day (bpd), according to a statement from state-run oil company Saudi Aramco, or more than 5% of global supply." "And while Aramco is confident that it can recover quickly, if it can't, however, the world could face a production shortage of as much as 150 MM barrels per month. An outcome which could send oil prices into the triple digits," wrote M Kern. Oil industry executives are predicting a rise of $10 per barrel if supplies are not restored quickly. Despite such predictions, oil prices have actually fallen a few cents today. Claiming responsibility for the attack, a Houthi spokesman said, "We promise the Saudi regime that the next operation will be wider and more painful if the blockade and aggression continues." Dismissing Houthi claims, US Secretary of State Mike Pompeo tweeted, "Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world's energy supply. There is no evidence the attacks came from Yemen." He may have a point. The Houthis control an area on the west coast of Yemen bordering the Red Sea and including the capital city of Sana'a, whereas Abqaiq, the site of the attacks, is near the east coast of Saudi Arabia, about midway between al Hofuf and Dhahran, over 1,000 miles from the Houthis. Thus, it is opposite to Iran on the Persian Gulf. Iran has much to gain from this attack. Sanctions by the US have slashed oil output from around 2.5 million bpd in April 2018 to around 400,000 bpd today. Europe has created a parallel system called Instrument in Support of Trade Exchanges (INSTEX) which is a kind of barter system to trade with Iran. By avoiding any currency this protects European banks from US sanctions. Despite this, trade with Iran has fallen sharply and its economy is contracting, with its currency the rial falling from 30,000 to the US dollar in 2016 to 120,000 today. From switching off tracking devices to offloading to other vessels while out at sea, Iran is using every trick to sell its oil, but it must be having to take a huge cut in the price. Any rise in the price of oil will help its economy. By not attacking US or NATO vessels and by giving bragging rights to the Houthis Iran can deny any responsibility. Any loss of face for Saudi Crown Prince Mohammed bin Salman, who is the real power in the Kingdom, is a moral victory for Iran. A kind of stalemate. Over to the US.

Need to include the middle class for inclusive growth.

"Ram Babu, who runs a hole-in-the-wall grocery store in Nateran village nestled deep inside Madhya Pradesh's Vidisha district, doubles up as a daily wager," wrote S Bera. "I have sold only three packets of biscuits over the past month and people have stopped buying soaps and shampoos," Babu said, pointing to five-rupee packs of Parle-G biscuits stacked on a shelf. In the same village, farmer Mohar Singh worries about "bank loans of Rs 500,000; soybean and pulses crop destroyed by excess rains; credit from grocery stores running over Rs 50,000 which he has to pay back with 2% monthly interest". Lunch for the two children of Rajesh Ahirwar is roti with fried green chillies. Sahab Bai has the same along with rice cooked in salt and turmeric. "Between 2011-12 and 2017-18, earnings of regular workers declined in both rural and urban areas." The collapse in demand is reflected in a slump in orders at the Peenya Industrial Area on the outskirts of Bengaluru. "Rural regular wages declined by 0.3% per annum, while urban wages declined by 1.7%," wrote Prof Himanshu. He recommends "demand injection", even if it breaches "the Center's fiscal deficit target". Some sort of Universal Basic Income (UBI) perhaps, which was promised by the Congress before the elections, but dismissed as impractical by SAA Aiyer. A modified form of UBI promises 100 days of paid employment every year to the rural population, known as the MGNREGA scheme. Rs 600 billion has been allocated to the scheme in this year's budget. The other way would be a selective 'helicopter drop', in which dollops of cash would be handed out to the needy. This has been achieved by waiving bank loans given to farmers, at a cost of trillions of rupees. "Currently, the total Central and state subsidies going for agricultural sector are estimated to be over Rs 2.2 trillion," wrote R Chand, member of Niti Aayog. All farmers are to receive Rs 6,000 per year and, just yesterday, the Prime Minister announced pensions to everyone in Jharkhand, except for taxpayers. Inflation numbers support rural distress. "For August 2019, rural food inflation is 0.9% while the urban equivalent is 6.42%," wrote R Kishore. ""Subdued inflation in rural areas suggests that incomes have collapsed and people are not being able to afford even basic items." Consumer confidence is down to zero, which is deterring people from spending, reducing tax collection and preventing the government from splashing cash to stimulate the economy. The top 1% of the population in India earned 23% of national income in 2017, same as in the US, wrote Prof K Viswanathan and A Banerjee, while France, Germany, Switzerland, Sweden, the Netherlands and Denmark have much less inequality. The difference is that these countries have strong social support for everyone while in India, the US and UK social schemes are targeted. Perhaps, that is the solution to 'inclusive growth'.

What could be better than being paid to borrow?

The European Central Bank (ECB) cut interest rate and resumed bond buying to add stimulus to the Eurozone economy. "In outgoing ECB President Mario Draghi's next-to-last meeting, the central bank, as expected, delivered a 10 basis point cut to the deposit rate that banks pay to park excess reserves with it. The move pushed the rate to minus 0.5%." "The ECB said it would begin buying 20 billion euros a month worth of securities beginning Nov 1." The annual inflation rate in the euro area was 1% in August, unchanged from the previous month, and well below the desired rate of 2%. Europe's largest economy "Germany is in danger of a recession, a Munich-based economic research center said on Tuesday." "The German economy is at risk of falling into recession. Like an oil slick, the weakness in industry is gradually spreading to other sectors of the economy, such as logistics, one of the service providers," Timo Wollmershaeuser, Ifo's head of forecasts, said in a statement. But monetary stimulus alone will not suffice, fiscal spending is needed as well. "With storm clouds gathering over the economy, what Europe really needs is for Germany to open up its pocketbook and start spending big." "The possibility of major German spending to upgrade infrastructure and tackle the climate crisis is generating lots of excitement," but, the "Europe's largest economy is notoriously wary of borrowing." US President Donald Trump immediately demanded deep rate cuts from the Federal Reserve to weaken the dollar. He views negative interest rates as a form of currency war and would like the Fed to do the same in the US, to level the playing field. "The euro area, Switzerland, Denmark, Sweden and Japan have allowed rates to fall slightly below zero," which forces banks to lend, instead of parking excess funds with the central bank. Jyske Bank A/S of Denmark is "offering 10-year mortgages at a rate of negative 0.5%". Which means, the bank will pay borrowers to borrow from it. Government bonds of a large number of developed countries offer negative yields, and yet investors have bought $15 trillion worth of such bonds. They are so risk averse that they are willing to bear a loss on their capital. "Central bank chiefs are under tremendous pressure from fiscal authorities across countries," wrote A Ranade, so that " central banks in advanced economies have become lenders of first resort", instead of "lending only against sovereign risk" as a last resort. "All that their policies have engendered is reckless risk-taking in financial markets, more leverage, greater inequality and tremendous stress on savers, bank deposit holders and pensioners," wrote Prof VA Nageswaran. "It is entirely possible that we are now entering an era of low economic growth and a higher rate of deflation being the norm," wrote D Mohan. We must get used to low rates of growth, wrote R Sharma. It does not matter in rich nations where falling population numbers mean low unemployment and higher per capita GDP but the population is still increasing in India. Interest rate in India should go down to 4% or even 3.5-3%, suggested N Rajadhyaksha. Only rich people can borrow, the poor have no collateral. Easy lending could lead to more non-performing assets (NPAs). Every medicine has a side effect. 

How can you cut when they are the only ones paying?

The slump in demand for motor vehicles and real estate is because manufacturers and builders are lobbying for a reduction in taxes, wrote R Jagannathan. "The case for a big-bang revival package, led by direct and indirect tax cuts, has never been stronger," he wrote. Incremental changes are making things worse as people stop spending as they wait for prices to drop. Earlier he had advocated a flat rate of 15% for both indirect and direct taxes. "The number 15 should be seared into tax codes, both direct and indirect, either as a current objective or a long-term one, to be achieved in stages." He disapproves of harassment of taxpayers by officials because of unrealistic targets set on them by the Finance Minister. "This is not the time for taxing anybody more or going hell for leather on tax compliance. This is time to leave more money in the pockets of all economic agents." There are two problems with this view. Firstly, elections are won by subsidies and Prime Minister Narendra Modi has massively added to the number of social schemes left by Congress. Since he won the election Modi has added handouts of Rs 6,000 per year to every farmer and a pension scheme of Rs 3,000 per month for farmers after the age of 60 years. "Economists complained about the BJP not merely continuing the Congress' welfare schemes like Mahatma Gandhi National Rural Employment Guarantee Act, the right to food and the right to education, but actually increasing the number of schemes, budgetary allocations, and the importance the government was giving them in its work and campaigns," wrote Prof Ila Parnaik. The reason is that Modi has learnt from the BJP's defeat in 2004 that India Shining does not work. Handouts do. So social schemes are announced first and then the Budget is built around it. Secondly, "Despite a very low percentage of tax filers falling in the highest tax liability brackets, the lion's share of direct tax revenues comes from a small pool of rich taxpayers," wrote N Kwatra. A total of 565 million income tax returns were filed this year, about 4% of the total population of 1,369 million. If rates of direct taxes are reduced for this small number of people the opposition will have a field day in accusing the government of favoring the rich. Number of taxpayers cannot be increased because people do not earn enough. "Overall, 72% of regular workers earned below the minimum monthly salary of Rs 18,000 prescribed by the Seventh Pay Commission." Regular workers are the less than 20% of the total workforce who work in the formal economy. Over 80% work in the informal sector where wages are lower and there are no safety nets. That is why people with PhDs and Masters degrees apply for menial jobs in the government. The rich seek to escape an increasingly despotic land, even risking their lives by paying people smugglers to take them to richer nations, leaving the poor behind. How can you cut taxes on the few who pay any tax? 

She may wish to spend more, but can she?

"The government will frontload infrastructure spending in a bid to give the economy a boost and announce one or two more sets of stimulus measures aimed at reviving growth in the coming quarters, said finance minister Nirmala Sitharaman." The reason is that growth rate of the gross domestic product (GDP) dropped to 5% in the quarter ending 30 June. Manufacturing sector grew by just 0.6%. This was the lowest GDP growth rate in 6 years. "Consumption, the bedrock of growth in the past few years, collapsed to an 18-quarter low of 3.1% from 10.6% in the March quarter, pointing to a fragile sentiment." "A Bloomberg gauge of high-frequency indicators suggests that economic activity continued to weaken in July, with investment and consumption both falling." "Growth has now slipped below the long term trend of 6.6% for two consecutive quarters, which implies that India is effectively in a quasi-recession." said Teresa John of Nirmal Bang Equities. Singapore's DBS banking group revised this year's growth down to "6.2% from 6.8% projected earlier". But, Morgan Stanley predicts growth for the financial year to fall to 5.8%, while Nomura is even lower at 5.7%. "The entry-level car segment, which once formed a critical chunk of Indian car bazaar fulfilling the dream of many middle-class families to own a car, crashed by more than 56% in the first five months of this fiscal." Entry-level motorcycle sales have also declined by double digits. "Nearly 60,000 diamond workers are currently jobless across Gujarat, of which 13,000 are from Surat." "The total debts of Vodafone Idea and Tata Motors as on 31 March 2019 were Rs 1,08,524 crore (Rs 1.08 trillion) and Rs 91,124 crore (Rs 911 billion) respectively," while their market capitalisation is only Rs 14,396 crore and Rs 33,594 crore. Several companies with high debts may go under, throwing thousands of people out of work. Households have been "dipping into their savings in the recent past, and also leveraging themselves" which is restricting their ability to spend, wrote A Mehta. This is shown in the fall in personal loans to buy cars and durable items, such as televisions and refrigerators, wrote R Kishore. "Another disturbing trend in the personal loan data is the fact that educational loan growth has been falling continuously in the last decade and it has actually declined in the last two years." "India's per capita income now is around $1,800 per year (in exchange rate terms) -- awfully low and around one-fifth of China's," wrote S Chakrabarti, so we cannot afford to grow at a measly rate of 5%. "Only once the government creates demand for goods and services through extra deficit-spending will new jobs and incomes be generated," wrote A Ranade, so a "fiscal push is inevitable". The government has been massaging the fiscal deficit through off-budget borrowing, which could be over 5%, while the public sector borrowing requirement (PSBR) maybe 8.5-9%. Fitch Ratings warned India not to slip on its deficit because government debt is too high, though it sugar-coated it by predicting higher growth rate. The government can't spend and the people won't spend. Stuck where we are.