From a fat midget to a lean giant, is it possible?

The Reserve Bank of India (RBI) "has started worrying about benign inflation, which has remained low for a long time now within RBI's comfort zone, allowing it to bring down policy rates". In its last meeting the Monetary Policy Committee (MPC) "suggested that the significant moderation in retail inflation was actually reflecting softening of demand in the economy". This is bad because it shows that, "India is now in the third growth recession since 2008. Economic growth has already slowed sequentially for four consecutive quarters," wrote N Rajadhyaksha. The economy is still growing, but not as fast as the government would like. The US economy is projected to grow 2% in 2019, "Japan has rarely grown faster than 1%" since the global financial crisis of 2008, and, "Europe has struggled to sustain growth faster than 1.5%," wrote Ruchir Sharma. The reason for lower economic growth is that populations in these countries are not growing any more. "When populations are growing slowly, the economy doesn't need to grow as fast to keep incomes high." "Slower growth in the working age population also means less competition for jobs, which explains why unemployment is at record lows not only in the United States but also in Germany and Japan." It does not apply to India because, "Around 2027, India is projected to overtake China as the world's most populous country, says the latest report released by the United Nations." With such a humongous population "India needs to grow at 9-10 percent for the next three decades for lifting millions of people out of poverty," said Niti Aayog CEO Amitabh Kant. "The country will need to grow by 9 percent every year for five years continuously and raise aggregate investment rate to 38% of GDP to achieve Prime Minister Narendra Modi's vision of turning India into a USD 5 trillion economy, EY has said." Forget 9%, "India's economic growth is set to slow further in the April-June quarter of this year to 5.7% amid contraction in consumption, weak investments and an underperforming service sector, says a Nomura report." Despite low economic growth "confidence surveys suggest Americans are content with record low unemployment, benign inflation and 1.4% growth in GDP per capita". The per capita GDP in the US was $59,484 in 2017, so a 1.4% growth is nearly $8,000, around 4 times India's GDP per capita at $2,041 in March 2019. Like the US, India's economy is dependent on domestic demand, but unlike the US, consumer confidence is falling in India. Without blistering growth unemployment will only rise from record levels today as the population grows. That is why Americans are happy with 2% growth, while there is panic with over 5% in India. Still, Indians die to go to the US.  

Who wants difficult decisions? What if they fail?

"After June quarter results, earnings estimates of a large number companies continue to be downgraded," wrote Jethmalani and Karnat. Why? "Over the last six-nine months, the sharp decline in demand for consumer discretionary spends seen initially has spread to consumer staples too. On top of this comes the deterioration in the government fiscal position that has led to constraints on its ability to increase spends on infrastructure, or provide any other form of fiscal stimulus." "There has been spike in downgrades and ratings suspensions on debt papers of listed companies in the second half of fiscal 2019, indicating a deterioration in corporate health, data from the Reserve Bank of India's (RBI) financial stability report shows." Indian companies are having to "downsize and, in some cases, pull down their shutters" because of "a weakening consumer confidence, an uncertain business environment, and regulatory risks", wrote D Chaki. This all happened after the financial crisis of 2008, when "Lenders, especially public sector banks (PSBs), were encouraged to lend generously to the private sector to boost liquidity and demand," leaving them with bad loans of Rs 10.3 trillion. Contrast that with the US, where the government earned a profit of $15.3 billion from its Troubled Asset Relief Program (TARP) which was a bailout of banks, insurance and car companies worth $426 billion. The RBI cut the growth rate for the Indian economy from 7% to 6.9% while cutting interest rate by 35 basis points. But, according to R Sharma, "For emerging nations such as  India, 5% is the new 7%, the appropriate aspirational standard." "Now, among the world's 200 economies, just eight or one in 25 are on track to grow 7% this year. Most of those are small economies in Africa." Used to government protection, Indian companies are demanding a stimulus package from the government through increased spending, as well as lower interest rate. Apparently, the government is also thinking of a stimulus package by decreasing taxes on certain sectors, such as automobiles, and a relaxation of the fiscal deficit target by 0.5% which will allow extra spending of Rs 1.15 trillion. The fiscal deficit will go up anyway because assumptions on tax collections were wildly optimistic in the budget. The government is already committed to a stimulus through subsidies of Rs 3.02 trillion this year, which does not take into account farmers' loan waiver and MUDRA loans, which alone may total over Rs 3 trillion. Naturally, tax officials are resorting to threats and strong-arm tactics to extract as much money as they can. Biocon founder Kiran Mazumdar Shaw was warned by "a government official" not to speak about issues such as "income tax harassment". The government has managed security and subsidies much better than the economy, wrote S Chakrabarti. That is because it is easy to sacrifice soldiers and taxpayer money. Who wants responsibility for the economy?

Not just in Mississippi, it's everywhere.

"The first question I get when I tell people I live in the Mississippi Delta is, 'Why'?" wrote Jemar Tisby. "Nothing stands between you and the stories you hear about slavery, Jim Crow, and the civil rights movement." Jim Crow laws were enacted by Democrats to enforce segregation of blacks and whites. The original Jim Crow was a deformed black slave whose song was copied by a white man Thomas Dartmouth (TD) 'Daddy' Rice who would blacken his face to perform in front of white audiences. "In our town, the Confederate cemetery, which now sits in the corner of a larger cemetery, was meant only for white people. A completely separate plot of land in another part of town, unkempt and underfunded by comparison, was reserved for deceased black people," wrote Tisby. The initial wealth of the United States came from export of cotton which was built on slavery. "If the Confederacy had been a separate nation, it would have ranked as the fourth richest in the world at the start of the civil war." "By the start of the war, the South was producing 75 percent of the world's cotton and creating more millionaires per capita in the Mississippi River valley than anywhere in the nation. Slaves represented Southern planters' most significant investment -- and the bulk of their wealth." Edward E Baptist has written a book -- 'The half has never been told: Slavery and the Making of American Capitalism'. Slavery was highly productive, he says, "The incentive is if you don't do this you'll get whipped -- or worse." It was this that turned the US "from being a colonial, primarily agricultural economy to being the second biggest industrial power in the world". Slavery may have ended in the US but it continues in other parts of the world. Bonded labor is a form of slavery practiced in India, where entire families are made to work for no wages to pay off loans they took to deal with sudden emergencies, such as severe illness. Particularly, appalling is the use of children as bonded laborers to pay for loans taken by their parents. Kailash Satyarthi received a Nobel Prize in 2014 for his campaign to end this pernicious practice in India and in the world. In India, "Some 174 children go missing everyday. Only about 50% of them are ever found again." Thousands of girls and women are abducted or tricked with promises of well-paid jobs and sold into prostitution. "The United States is again ranked as one of the worst countries in the world for human trafficking," according to a recent report by the State Department. But no nation can beat China which arrests Falun Gong members on fictitious charges and then harvests organs of healthy people for transplants. Tisby is angry that "racism never really goes away" but he should also remember the hundreds of thousands of whites who died in the Civil War to abolish slavery in the US. The story of slavery is the history of human brutality, but also of Lincoln and Satyarthi and the many who died fighting it. Perhaps, we should not lose hope. 

Who knows if it is cyclical or structural?

To alleviate the slowdown in the Indian economy we have to understand that, "The structural versus cyclical distinction is extremely important because this has a direct bearing on the choice of policies to boost economic activity," wrote R Kishore. Those who believe that the problem is cyclical lay the blame on the 'policy paralysis' of the Congress-led government prior to 2014, which led to the 'twin balance sheet problem', wherein companies saddled with huge debt could not invest in new projects while banks refused to lend until all the bad loans had been cleared. Those believing in the structural argument point to continuous fall in intention to invest in new projects, shown by the investment data from the Center for Monitoring Indian Economy (CMIE). Slowdown means a drop in the growth rate of the gross domestic product (GDP) which is "the sum of consumption expenditure, investment, government expenditure and net exports (exports minus imports)," wrote V Kaul. On consumption: Domestic car sales fell by 23.3% during April-June 2019 compared to the same period last year, two-wheeler sales fell 11.7%, tractor sales, an indicator of rural demand, fell 14.1%, unsold housing units increased from 1.2 to 1.28 million units, non-oil, non-gold imports fell 5.3% and growth of fast moving consumer goods (FMCG) fell from 12% to 5%. Announcement of new projects fell by 79.5% and of completed projects by 48%. Naturally, growth in bank lending to industry, rail freight and steel consumption was weak. Government expenditure contributes 10-11% of the economy but growth in tax revenue is weak, so the government cannot stimulate the economy by increasing spending, and net exports were slightly better at minus $46 billion, compared to minus $46.6 billion in 2018. Tax collections grew by 1.4% from April to June 2019 compared to last year and "The shortfall in the Center's GST (goods and services tax) collections was as high as 22% in the last financial year" wrote N Kwatra. The way to judge if revenue is increasing is to measure tax buoyancy which is "calculated by dividing the annual growth in gross taxes by annual growth in nominal GDP", wrote R Kishore. Tax buoyancy is falling, probably because "the official statistics have been overestimating GDP growth". "Taxpayers after all pay taxes on actual incomes rather than what the Central Statistical Office thinks incomes are." "Nationally, only 1.8% of the population reported receiving formal vocational/technical training in 2017-18," wrote Anand and Thampi. "But about 42% of youth who received formal training were not part of the labor force at all (that is they were not working or seeking employment opportunities, they reported)." If people don't work they do not pay income tax and they cannot spend, so GST collections fall. Regular salaried workers comprise just 8% of the workforce, wrote Anand and Thampi, and 45% of those earned less than Rs 10,000 per month and 12% earned less than Rs 5,000 per month. No jobs, no money, no taxes. Cyclical or structural, doesn't matter.

Don't know about others, we'll be fine.

"Corporate investors tracking corporates in the busy earning season are slowly waking up to alarming yield inversions in advanced economies of the US and the UK," wrote A Mudgill. Yields have flattened in Germany, Japan, Singapore and Australia, pointing to a global slowdown. "Inversion of yield is a phenomenon where long-term bond yield drops below short-term yield. It is widely tracked by financial markets to track signs of recession." Not just flat yields, yields have turned negative on government bonds, with German 3-month bond yields at -0.558% while the 10-year bond yield is at -0.593%. Normally, yields on long-term bonds are higher, to reflect financial risks that may arise in the future but returns on long-term German bonds are lower than on short-term ones, known as inversion of yields. Not just that, "Jyske Bank, the third largest bank in Denmark announced it will pay customers to take out mortgages by offering negative interest rates. Jyske Bank will offer homebuyers an interest rate of -0.5%." "It would have been unthinkable even a few years ago to have high-yield/speculative/junk bonds being sold for negative yields," wrote VA Nageswaran. A report by the Wall Street Journal said that "14 European companies with junk bonds worth more than 3 billion euros ($3.38 billion) are trading with negative yields." "Globally, about $13 trillion of debt is trading at negative yields." "King dollar is rising. Other currencies are falling like ninepins,' wrote A Mukherjee. So, governments resort to currency swaps which are usually what "a bank has to pay to borrow dollars by this circuitous route rather than taking an outright Libor loan". "Take India, which owes a net $436 billion to foreigners, and is perched a rung above Italy on the sovereign ratings ladder, according to Moody's Investors Services. The 10-year Indian rupee bonds offer 6.4%, versus 1.5% in euros on the Italian benchmark. However, Japanese investors looking to lock in returns in yen will get 1.6% yield pickup in Italy, while they'll lose money on the Indian bond." The world has become "flat and slow". wrote Ruchir Sharma. After the crisis in 2008, governments erected barriers and central banks provided easy money which "propped up inefficient companies and gave big companies favorable access to cheap credit, encouraging them to grow even bigger". "Zombies now account for 12% of companies listed on stock exchanges in advanced economies and 16% in the United States, up from 2% in the 1980s." So, what about India? "Despite stagnant incomes and increased joblessness, Indians are hopeful about the economy's future," wrote Mahesh Vyas of the Center for Monitoring Indian Economy. We are optimistic and have 17 colleges of astrology. We have the cosmos in our favor.

Rules only for the ruled.

"Amid allegations of 'tax terrorism', finance minister Nirmala Sitharaman has sought a mindset change in tax officials while advocating a technology driven approach." "Tax officials have a delicate role to perform. A mindset change is needed to cater to an informed citizenry," she told a large gathering of tax department officials on Friday. Surely, she is being cute? She is the one who set extremely high and unrealistic tax collection targets on officials in this year's Budget. "While corporation tax mop-up is expected to register a 14 percent growth to Rs 7.7 lakh crore (Rs 7.7 trillion) this fiscal compared with the previous year's revised estimates, personal income tax is expected to grow 7.6 percent over the last year's number." "Net profit fell by 5.23% for the three months ended June 30 from a year earlier, showed a Mint analysis of 1,284 listed companies" despite a fall in prices of crude oil and other commodities. The total number of workers has fallen from 472.5 million in 2011-12 to 457 million in 2017-18, wrote Prof Himanshu. As shown by a fall in household consumption expenditure, there has been a rise in poverty during the first term of Prime Minister Narendra Modi, wrote Himanshu. "In 2018 prices, average consumption expenditure in rural areas declined from Rs 1,587 per person per month (ppm) in 2014 to Rs 1,524 ppm in 2017-18. The decline in urban areas was from Rs 2,926 ppm in 2014 to Rs 2,909 in 2017-18." India has always experienced inability of supply to keep pace with demand, wrote H Damodaran. "All this has changed in the last three years or less. The certainty that producers once enjoyed -- of finding buyers for their wares without doing much beyond minor price adjustments to bring supply and demand into equilibrium -- has ceased to exist." He agrees with Himanshu that this started in agriculture in 2014 and has spread to the rest of the economy. If corporate earning falls because of low demand how is Sitharaman demanding a 14% increase in corporate taxes? A study by Center for Monitoring Indian Economy (CMIE) showed that "unemployment level rises proportionately as education level rises among those studied". At 13.2% unemployment was highest among graduates. If educated people cannot find jobs how does Sitharaman expect a 7.6% rise in personal income tax collections? "Growth in fast-moving (FMCG) consumer goods slumped in the past four quarters in a row since July-September 2018" which means lesser sales tax collection. "The use of technology and faceless assessment is the need of the hour in tax administration today," Sitharaman said. Are threats through emails and text messages any less intimidating for hapless citizens? Indian politicians cannot understand how menacing they are because they are above the law. We, the people, on the other hand, cower in fear. The rulers and the ruled. 

Is it time to be less optimistic?

"Democracies are built to slow you down," wrote R Jagannathan, comparing India with China. "Autocracies are built for speed." Till the 1980s the economies of China and India were about equal but today, at $13 trillion, China's GDP is 5 times that of India's at $2.6 trillion. Why? Because, "China used autocratic methods to ride roughshod over labor and land ownership rights, and indulged in financial repression in order to channel domestic savings and foreign investment into infrastructure and export manufacture." China suffered the 'Great Leap Forward' under Mao Zedong, while India suffered the humiliation of begging for food from the US under the PL 480 program to stave off a famine in the 1960s. While Mao Zedong unleashed the Cultural Revolution to regain total power after the failure of the Great Leap Forward, India suffered a period of Emergency when the media was silenced and opponents imprisoned. If China had "financial repression", Indian banks were nationalised in 1969, which was an "economic disaster but a smashing political success", wrote SA Aiyer. Prime Minister Modi may bang on about a "Congress-mukt Bharat", meaning an India free of the Congress, but he has made no attempt to privatize state-controlled banks because they allow him to use depositors' money for political gifts. "Global investment manager Ruchir Sharma, who has studied both types of states, says that over the long term the two deliver similar levels of economic performance," wrote Jagannathan. "Early on, when these countries were about the same per capita income level as India is today -- the East Asian economies were run by autocrats who favored a powerful but small government focused almost exclusively on export manufacturers, which meant investing in roads and factories, not welfare for the poor and weak," wrote Ruchir Sharma. "Between 1993 and 2005, Chinese state enterprises laid off 73 million people." "Contrast those attitudes to India, where government is suspicious of the private sector, and elections are fought on promises of generous welfare benefits for the poor." Perhaps, the main difference is that autocrats need to keep improving people's lives or they will face rebellion, while in corrupt democracies politicians blithely use taxpayer money to win elections by buying votes of poor people by distributing handouts. Only 68.5 million filed tax returns in 2017-18 out of a population of 1.3 billion, of which 20.2 million earned less than taxable income. The bulk of income tax collection comes from the top 5% of taxpayers, wrote N Kwatra. Modi won re-election because of his social schemes, wrote Prof Ila Patnaik. This means there is an unspoken agreement between politicians and the poor which takes away any accountability from politicians. Forget becoming a rich country, India is probably stuck in a low middle-income trap, according to a member of the economic panel advising Modi. Indians are very optimistic by nature. Time to be realistic. 

Despite her past record de Kirchner is set to win again.

"Argentine stock markets and its currency have both plunged after conservative Argentine President Mauricio Macri suffered a shock defeat in primary elections on Sunday." He lost to left wing challenger Alberto Fernancez who is running with former President Cristina Fernandez de Kirchner. The Argentine peso fell 15% against the US dollar and the stock market Merval index closed down 31%. Why the panic? Because, as president, de Kirchner allowed the country to default on its loans which immediately triggers a rating downgrade and makes it difficult for the government and businesses to borrow. She also forced the central bank to hand over its reserves to allow her to pay off government debts. "The tragedy is that Argentina entered the 20th century as one of the world's richest countries and left it an international pariah. For many, it has now quite simply become invisible or irrelevant," wrote J Webber in 2010. Last year, the IMF agreed a $57 billion deal with Argentina in return for spending cuts by the government, but the country remains in recession, with inflation at 22%. After his defeat in the primary President Macri "promised on Wednesday he would raise the minimum wage, temporarily freeze gasoline prices and income tax bracket floor by 20%". Kirchnerism, is derived from Peronism, a legacy of Juan Domingo Peron who was the only man elected three times to be president of Argentina. Peron's policies included social security, low-income housing and free healthcare for the poor and high taxes on imports to protect local industries. Last year, Deputy Governor of the Reserve Bank of India (RBI) caused great anger in government when he compared India with Argentina. He talked about the resignation of Argentina's central bank chief because of his inability to protect the bank's reserves from the government of Cristina Fernandez de Kirchner. Last December, RBI Governor Urjit Patel resigned because of the government's insistence on transferring Rs 3.6 trillion, more than a third of the total reserves of Rs 9.59 trillion of the RBI. The government is dishing out Rs 6,000 to all farmers and has announced a pension scheme of Rs 3,000 per month for farmers and small traders. A health scheme forces private hospitals to provide tertiary healthcare at government rates to the poor. No wonder, private hospitals are afraid of going bankrupt. Customs duties have been raised on imports to protect domestic industries. Our government's numbers do not add up, wrote O Goswami. "Taking a cue from Acharya's analogy, a better recent comparator for Modi might be former President of Argentina Cristina Fernandez de Kirchner, who served two terms in office from 2007 to 2015," wrote Prof V Dahejia. Ominous words.

Can't spend what you don't have.

"The government is stitching together a set of measures, including tax cuts and targeted sops, to reverse an economic downturn, three people aware of the ongoing discussions said, amid fears of a global slowdown." A panel led by NK Singh had suggested relaxing norms for fiscal deficit, which has been fixed at 3.3% in the budget, by 0.5% which would allow the government to spend an additional Rs 1.5 trillion and the government is committed to spending Rs 100 trillion on infrastructure which will stimulate the economy. The government overshot its spending target by Rs 1.5 trillion in 2018-19 by keeping its borrowing 'off balance sheet'. "According to estimates, about Rs 1.5 lakh crore worth of expenditure may have been pushed off balance sheet as borrowings at Food Corporation of India (FCI), PowerGrid Corporation, and a few other entities." The government just increased surcharge on income tax of people earning over Rs 50 million. The parliament passed an amendment to the Companies Social Responsibility (CSR) Act , which forces large companies to spend 2% of profits on social schemes, making it a criminal offence to fail in spending the full amount, punishable by fines of Rs 50,000 to Rs 2.5 million and up to 3 years in prison for company officials. It is thus a tax on companies. A high level panel has recommended that violating CSR rules should not be a criminal offence and companies should be given tax relief on what they spend, thus reducing tax collections. Meanwhile, "In July, passenger car sales plunged 36% to 122,956 units, while utility vehicles recorded a 15% drop to 67,070 units. Vans suffered 46% decline to 10.804 units." The automobile industry employs vast numbers of people in manufacturing parts, in assembly plants and in dealerships. When sales fall companies respond by cutting their workforce, and unemployed people spend less further reducing tax collections. GST rates on cars varies from 29%-50%, so falling sales means less tax collections. Naturally, companies are clamoring for a cut in tax rates. "The latest data from the Controller General of Accounts (CGA) shows that the gross tax collections of the Union government in the quarter ending June grew 1.4% from the year-ago period, the slowest pace since the slump following the global financial crisis in fiscal 2010," wrote N Kwatra. The government had hoped to increase collections by bringing the unorganized sector, which has been avoiding taxes all these years, into the tax net but that has not happened because the rules are so complicated that many do not file returns while others are able to game the system. People who were not paying taxes could not save the money in banks because they would be caught and so were forced to spend all of it, wrote R Kishore. All avenues for tax avoidance have been closed off so consumer spending has dropped. If revenue is falling how will the government stimulate the economy by increased spending? How to square the circle?

No sir, tax corruption and tax terrorism are not the same.

"Prime Minister Narendra Modi on Sunday said he will leave no stone unturned in making India the best investment destination in the world, a better place to do business..." Stirring words. But how? In 10 easy steps. On tax terrorism he said that the "Govt is aware of some black sheep in the tax department. Govt has compulsorily retired a number of tax officials, and will not tolerate this behaviour." Indeed, it did. The government forced "15 senior indirect tax officials from the Central Board of Indirect Taxes and Customs (CBIC)" to retire on charges of "corruption and improper conduct", after dismissing 12 senior income tax officers from service on charges of "corruption and professional misconduct". This was because the government thought that these people were collecting less taxes in exchange for bribes. 'Tax terrorism' means forcing honest taxpayers to pay extra money as a kind of ransom to avoid harassment. This is because "tax officials, driven by unrealistic targets set in the union budget, are under pressure to boost collections". "A Mumbai-based MNC, which is headquartered in the US, was asked to cough up 60% of the tax demand, and they did pay up fearing harassment," said a tax consultant. "Another pharmaceutical company was levied a tax demand of over Rs 70 crore. Sick of repeated calls from the taxman, the firm decided to pay up a portion of that demand." This is not legitimate tax owed to the government, but pure extortion. This year is going to be worse because the government has set a tax collection target of Rs 24.6 trillion, when there was a shortfall of Rs 1.7 trillion in 2018-19, despite resorting to thuggery, and there is a slump in consumer confidence which came in at 95.7 in July, down from 97.3 in June. When consumers lose confidence they stop spending, which is why sales of real estate, cars and consumer durables, such as refrigerators and televisions, are dropping. "Growth in the fast-moving consumer goods (FMCG) sector has slumped in the last four quarters in a row since July-September 2018, both by value and volume, as consumers shifted to cheaper daily essential brands in the urban markets and rural growth slowed." Lower sales mean lower tax collections. Slowdown in growth is here to stay. "My feeling is that though they (government) claim it is 7 percent, if we can maintain 6.5 percent we will be lucky," said Chairman of Larsen and Toubro AM Naik. One of the reasons why founder of Cafe Coffee Day VG Siddhartha committed suicide was harassment by tax officials, to which they replied that they were protecting revenue, apart from making unproven allegations. Couple of days back a truck driver was beaten to death by toll collectors for not being able to pay 10 times the toll amount. Modi's concern is not being able to extract higher collections because of corruption while people are dying due to tax terrorism. He is conflating tax corruption with tax terrorism. Not on purpose, we hope. 

What use is education without learning?

"For the last three decades economic pundits of all hue, most of whom cited China and its apparent economic miracle, have fed us the line that the only thing that matters is economic growth," wrote A Padmanabhan. This push for growth was financed by reckless borrowing by companies which they are unable to repay, leaving lending banks with a mountain of non-performing assets. Companies cannot borrow unless they clear their debts and banks cannot lend until they clear their books, known as the 'twin balance sheet problem'. "The deterioration in asset quality of Indian banks, especially that of Public Sector Banks (PSBs), can be traced to the credit boom of 2006-11 when bank lending grew at an average rate of over 20 percent," said Governor of the Reserve Bank (RBI) Shaktikanta Das. "Worse this growth left little trickle down for the bottom of the pyramid; the 1% just simply became richer." Padmanabhan recommends "redistribution", with higher taxes on the rich to fund social schemes for the poor, such as MGNREGA, free electricity connections and cheap housing. This will improve rural demand and, hopefully, will stimulate new investment. This is known as 'tax and spend' policy and has been extensively studied by economists. An analysis of direct taxes paid by Indians showed that "the top 5% of effective tax-payers in the country, equivalent to 0.1% of the country's population, contributed nearly three-fifths of India's income-tax collections. And the top 1% of effective tax-payers, equivalent to 0.03% of the country's population, contribute roughly a third of India's income tax collections," wrote N Kwatra. "In fact, India's personal income tax collection as a share of its GDP, at 2.5%, is higher than that of countries such as Vietnam, Bangladesh and Egypt and comparable to that of the Philippines." The government sharply increased surcharge on incomes above Rs 20 million in last month's budget. The stock market index the Sensex fell over 2% as foreign portfolio investors (FPIs) were also included in the surcharge, but jumped over 600 points on rumors of the government having second thoughts on taxing FPIs. The government has the power to increase taxes but cannot stop the rich from fleeing India. Officials claimed that top rates of taxes are higher in the US but the rich are fleeing to the US and Australia. It's not just high rates but the hostile treatment of taxpayers that is driving out the rich. East Asian countries grew rich by supporting their workers while social welfare was left to families, wrote Ruchir Sharma, whereas in India the "government is suspicious of the private sector" and elections are fought by competing on social schemes. China lifted 800 million people out of poverty by growing the economy and not through "redistribution". Maybe the reason we remain poor is because we refuse to learn. What use of education?

How to escape when so many are looking after them?

Prime Minister Narendra Modi's government "believes a boost to farm export is a sure-shot way to help double farmers' income by 2022", wrote SN Sharma. "Once a farm product is exported at scale, it reduces a glut in the market, there by checking a drop in prices and allowing farmers to realise better prices for their produce. "Presently, marine products, basmati rice, buffalo meat, spices and non-basmati rice make up 55% of the total agriculture export basket" and the government is "giving thrust to the cultivation of grapes, mangoes, chili, moringa, lemons and pineapples". "India's net agri-export surplus  (exports minus imports) increased from $3.7 billion in 2004-05 to about $27 billion in 2013-14", wrote Prof A Gulati. However, "The net surplus fell to $9.5 billion in 2015-16 and further to $7.8 billion in 2016-17." Global prices of agricultural products have fallen since 2013-14 making our products uncompetitive, but the main problem lies in government policies. "The inherent 'consumer bias' in these policies makes the trading environment unstable and unpredictable." "Exports are restricted through the use of minimum export prices and bans while the Essential Commodities Act is used to regulate private participation." The government procures 22 agricultural products at a minimum price so as to set a floor under market prices and prevent financial losses for farmers. However, wheat and rice are the main products procured by the government in memory of a near famine in the 1960s during which India survived on food aid from the US. Since then, the government has maintained a buffer stock of food grains in case the annual monsoon, on which our agriculture is totally dependent, fails. By June, the buffer stock had reached over 74 million tonnes, 81% above the norm. Since there is a shortage of silos to store the excessive buying by the government, India wastes about $14 billion worth of food every year, even though the nation has the largest number of malnourished people in the world. If farmers are sure of being paid for growing grains they would be reluctant to shift to other produce of which they have little experience and which spoil much more quickly. The Food Corporation of India (FCI) borrowed Rs 1.96 trillion in the last financial year  which has been kept off the official balance sheet. The main problem is the government itself. "Look at the sheer number of union ministries involved in agriculture exports: agriculture and farmers' welfare, fisheries, animal husbandry and dairy processing, food processing, micro, small and medium enterprises, commerce and industry, and even external affairs," wrote Sharma. When the Union cabinet has 64 ministers, there is no shortage of ministries looking after our farmers. They have no escape.

Money is a weapon, hence the currency war.

Couple of weeks back the US Federal Reserve cut its Funds rate by 25 basis points to 2-2.25%. US stocks fell sharply after the rate cut, the S&P 500 closing down 1.09% for the day. "US President Donald Trump called on the Federal Reserve to lower interest rates by a full percentage point, saying the nation's economy was being 'handcuffed' by the US central bank's policy." One percentage point is 100 basis points. Trump wants interest rates lower to weaken the dollar in response to China allowing its currency the yuan to fall below 7 to the dollar. A weaker currency makes Chinese goods cheaper which will increase exports to the US, thus neutralizing tariffs on Chinese goods and maintaining the huge trade imbalance between the US and China. Low interest rate is expected to help American companies to borrow cheaply to set up businesses within the US but "we should fear easy money", wrote Ruchir Sharma. Because, "with credit already dirt cheap, more cuts could bring on the kind of debt fueled market collapse that preceded the downturn not only in Japan in 1990, but in Asia after 1998 and across the world after 2008." If it is so dangerous why do politicians clamor for low rates? "Economists now dread deflation. For centuries, deflation was a common and mostly benign phenomenon, with prices falling because of of technological innovations that lowered the cost of producing and distributing goods. But the crippling downward price spiral of the 1930s and the more recent experience of Japan have given the word its scary connotation." On his visit to China Marco Polo first experienced paper money. "One of the things that astonished him most, however, was a new invention, implemented by Kublai Khan, a grandson of the great conqueror Genghis. It was paper money, introduced by Kublai in 1260." And, "if you didn't use it -- if you wouldn't accept it in payment, or preferred to use gold or silver or copper or iron bars or any of the older form of payment prevalent in China -- he would have you killed." China has not changed much since Kublai Khan. Naturally, monarchs used money to loot their people. "The creation of a single national currency simultaneously consolidated the power of nation states and the modern market," wrote R Bakshi. In early 20th century, regional currencies were created by communities but "as soon as community currency became notable in scale, spread, and efficiency, it was outlawed because it was perceived as a challenge to both the state and banks." Cryptocurrencies are a new invention but India has banned them and proposes jail sentences of up to 10 years for anyone using them. Money is a weapon of control. That is why we are seeing a currency war.

Such a great difference is difficult to comprehend.

Given a choice, which of two men would we prefer asked Chetan Bhagat. "One, a Bachelor of Arts graduate. Two, a 12th pass, in-demand electrician in one of Mumbai's neighborhoods. Or, say, if your cousin was looking to get married, which of the two would you recommend?" Bhagat has degrees from the most prestigious colleges in India, is a well known writer and worked for Goldman Sachs, no less. Whereas, 3,700 PhD holders, 50,000 graduates, 28,000 PGs applied for 62 posts of messengers in UP police last year. "One can hire a 'simple graduate' in India for around ten thousand rupees a month, maybe even less in smaller towns. An in-demand electrician in Mumbai, say Bandra, could easily make eighty thousand to one hundred thousand rupees a month." Yet, who should "your sweet little sister" marry? he asks. It's not people's fault that our education system is so poor that over 80% of our graduates are unfit for employment. Most artisans in India are 'mistiries' or 'cowboys' who have come from distant villages and have learnt their trade from a 'cousin' and the "sweet little sister" maybe educated and unwilling to live away from the facilities of a city. Is vocational training the answer? "Nationally, only 1.8% of the population reported receiving formal vocational/technical training in 2017-18," wrote Anand and Thampi. Of them, "As many as 33% of the formally trained youth were unemployed in 2017-18." Trained in what? "The bulk of the trainees were in the fields of electronics, IT/ITeS, apparels and mechanical engineering." No electrician, plumber, mason or carpenter. But, there is more trouble ahead. "Sectors including ecommerce, BFSI (banking, financial services and insurance) and BPO-IT-enabled services could see a drop of up to 37% in 2019-23 compared with the earlier estimates for 2018-22." Artisans work in the informal sector and, though they maybe earning well today, their incomes fall to zero if they fall ill or meet with an accident. People look for salaried jobs for the security they offer. But Bhagat is right in that, "In 2017-18, around 45% of regular workers  earned less than Rs 10,000 per month, and about 12% earned less than Rs 5,000 per month." These wages are impossible to survive on. Why do people take such jobs? Because, "While the unemployment rate for all age groups increased from 2.2% (2011-12) to 6.1% (2017-18), youth unemployment rate surged to a level never witnessed before in the Indian economy, increasing from 6.1% (2011-12) to 17.8% (2017-18)," wrote Prof S Mehrotra. Agriculture jobs declined from 232 million to 205.3 million and manufacturing lost 3.5 million jobs in that period. People leaving low paid agriculture sector is a good thing, wrote Prof Himanshu, but "the economy should have created at least 83 million jobs between 2012 and 2018 to accommodate those who have entered the labor force and those forced out of agriculture". With too many people chasing too few jobs there is no need to pay higher wages. The "sweet little sister" must learn to adjust.

People don't want to borrow because they don't want to spend.

The Reserve Bank of India (RBI) reduced interest rate by 35 basis points yesterday,in an effort to stimulate growth in the economy. Apparently, the Monetary Policy Committee (MPC) considered a "standard 25 basis point (cut) might prove to be inadequate in view of the evolving global and domestic macroeconomic developments. On the other hand, reducing the rate by, say, 50 points might be excessive, especially after taking into account the actions already undertaken." The RBI maintained its accommodative stance indicating more cuts to come. Low interest rates make it easier for companies to borrow cheaply and set up new projects which create new jobs and thus enhance wealth. That is the theory. "I have had meetings with both public and private sector banks and the system is today ... flush with liquidity," said RBI Governor S Das. Banks do not like money to lie idle so if they have a lot of money lying around they will lend at lower rates anyway. "The answer must be that there's a much greater political short-run payoff from lower interest rates than from higher interest rates," wrote MJ Perry about low interest rates in the US. "That is borrowers (including corporations) must have louder and organized political influence than disorganized savers. In that case, aren't lower interest rates a form of legal plunder and crony capitalism...?" The biggest borrower is, of course, the government which is set to borrow Rs 7.10 trillion this financial year to pay for its expenses. Yields for 10-year government bonds have fallen from over 7.6% in March to 6.37% which reduces its interest payments. Out of the total expenditure of Rs 25 trillion in this year's Budget, revenue expenditure will be Rs 20 trillion, that is around 90%. Revenue expenditure includes "salaries, wages, pensions, subsidies and interest", which do not create any assets and so are considered wasteful. Retail inflation was 3.18% in June, which is below the 4% target set for the RBI. Crude oil prices have dropped into a bear market territory, which is defined as a drop of more than 20%. The RBI is confident of inflation remaining in its comfort zone because we import 84% of our oil consumption and a bear market in oil is highly beneficial. Lowering interest rate can only have effect if banks pass on the cuts to borrowers. Interest rate was cut by 75 basis points in the last few months but banks reduced their lending rates by only 11 points, wrote A Iyer. That is because when the government borrows so heavily, there is little left for the private sector. The RBI has to create trust which means "making the government more honest about fiscal deficit in the first place". Companies will start new projects only if there is demand. Growth in fast moving consumer goods (FMCG) is slowing down. People take loans to buy houses or cars but not to buy toothpaste or washing powder. You can force people to pay high taxes but you cannot force them to spend. Stalemate. 

It is welcome, but are there intrigues we don't know?

In a sudden move the Indian government revoked Articles 370 and 35A on Kashmir and declared it an integral part of the nation. Article 370 gave a special status to Kashmir, partly its own constitution and its own flag and Article 35A banned any Indian not resident in Kashmir from buying or owning property in the state or applying for state government jobs. Special status rights are enjoyed by 10 other hill states, including Assam, Himachal Pradesh and Uttarakhand. Article 370 was not in the original constitution of India but was apparently forced through by our first Prime Minister Jawaharlal Nehru to please Sheikh Abdullah. Even at that time many members of the Congress, the BJP did not exist in the 1950s, were against special provisions for Kashmir but accepted it reluctantly. Even today, Congress leaders are against revoking the article, maybe in loyalty to Nehru's memory, but many of the younger leaders have supported the government's stand. For the ruling BJP, scrapping Article 370 is an act of faith because it was opposed by SP Mookerjee, who founded Jana Sangh in 1951, which was the parent of the modern BJP. "There are times in the history of a republic when it reduces itself to jackboot. Nothing more and nothing less. We are witnessing that moment in Kashmir," fulminated PB Mehta. Which is silly, because Kashmir was a festering sore, constantly used by the Pakistan army to justify its support for terrorists and demand 'constructive dialogue' as an equal. "The removal of 'special status' does allow India to say there is no dispute to discuss with Pakistan anymore," wrote S Sirohi. In its statement, Pakistan said it "strongly condemns and rejects the announcements made today by the Indian Government regarding the Indian occupied Jammu and Kashmir", which is utter rubbish because it has handed a large swathe of Kashmir territory to China to build the economic corridor. The regular bloodshed of Indian soldiers and innocent civilians in Kashmir was unacceptable so this is a welcome, if slightly risky, move. But, why now and why so suddenly? The annual Amarnath Yatra, a Hindu pilgrimage due to end on 15 August, was suddenly stopped and all tourists were told to get out of the valley. Pakistan Prime Minister Imran Khan's recent visit to the US was deemed extremely successful because US President Donald Trump asked for help to end the war in Afghanistan and offered to mediate in the Kashmir dispute, which is a strict no-no for India. India kept the US informed of its move on Article 370. In a blow to Pakistan, the US said that revoking Article 370 is an internal matter for India, prompting an angry Shehbaz Sharif to ask Imran Khan, "Was Trump's offer to mediate his trump card or trap card?" So, has this anything to do with US discussions with the Taliban to get US troops out of Afghanistan? Or, does the US want troops to be safe in Afghanistan if there is war with Iran? Did the US hatch this plan? Such intrigues. Isn't it thrilling?

How low can the yuan fall?

Last week US President Donald Trump announced that he is going to impose 10% tariffs on $300 billion of goods from China, in addition to the $250 billion worth of imports from China that already attract 25% tariffs. In an underhand strategy, China smuggles large quantities of the synthetic opioid Fentanyl into the US. In its usual response, China denied that it is a source of Fentanyl, just as it denies economic espionage, intellectual property theft, forced technology transfer and other crimes. Can China stop smuggling of Fentanyl? Absolutely. This is a nation that has no problems in abducting little children from their parents and confining them in camps for brainwashing. In retaliation to Trump, China weakened its currency, the yuan, and instructed all state owned companies to stop buying US agricultural products to hit Trump's voters. The US has declared China a 'currency manipulator'. Chinese President Xi Jinping maybe banking on Trump losing next year's re-election and a more sympathetic Democratic candidate in the White House, so he is willing to accept any damage to the Chinese economy, probably lulled by China's importance in the global supply chain. Wall Street analysts warned that China's currency devaluation is "on a scale of 1-10, it's an 11" in its trade war with the US. "The most celebrated victories in Chinese history are not based on valor, but on deception. These successful battle strategies are rigorously taught in Chinese academies and are an integral part of the Chinese leadership's worldview," wrote S Deb. No longer. "China wants to capture the emerging hi-tech industries of the future with one goal in mind: to replace the United States as the world's dominant power," wrote SW Mosher. "This is President-for-life Xi Jinping's "China Dream," and it's revealing that he no longer hesitates to admit it." C Block wrote about "the wave of reverse merger frauds from the last decade in which literally hundreds of fraudulent companies from China, listed in the US, collectively raising tens of billions of dollars from investors. The funds went to China, separated forever from those wronged by the fraud." "President Trump's critics like to denounce him for coddling dictators," wrote Ying Ma. And yet, "Trump has proudly and noisily waged a trade war against China, something that no recent US president -- all far more dignified in their rhetoric -- has come close to threatening." At $5 trillion, Japan's economy is less than half the size of that of China, but the Japanese yen is seen as a safe haven currency, while the Chinese yuan is not. China has been overtaken by Mexico and Canada as the biggest trading partner for the US. For us in India it is simple. The US is an on-off friend, but China is an existential threat. Good luck to the US.

A scenario depends on who is looking.

Economists at the World Economic Forum (WEF) used scenario planning in 2006 and predicted that "India's growth would accelerate for a few years and and then it would decelerate if increasing inequalities were not addressed with good politics, and institutions of governance were not improved. This has actually happened," wrote A Maira. Scenario planning involves collecting information from all departments of government and then formulating bold strategies to deal with them. That is not possible in India. "Under Atal Bihari Vajpayee's NDA-1 government, while India saw the pace of market-friendly economic reforms pick up, development seems to have left the poorest out of the country's growth story," wrote Prof Ila Patnaik. Hence, Prime Minister Narandra Modi resorted to handing out free gas connections, free healthcare, free cash and other benefits to win 2019 general election. Prof VA Nageswaran finds that "we Indians sweat the small stuff too much. This includes myopia, staking egos on small priorities and a genuine inability to see the big picture." The government quickly withdrew "provisions in its labor codes making it possible for employers to retrench up to 300 workers without prior government approval". The Budget increased customs duty on a range of items, including gold, apparently to support local industries. The present government's policy of import substitution "will take economy down from turnpike to dirt road", wrote Prof A Panagariya. Increased taxes on gold has made smuggling enormously more lucrative. Gold smuggling from Myanmar is estimated at Rs 90 billion in 2017-18. Why is economic growth slowing in India? "Because India is a high-cost economy that cannot compete with its Asian peers. India has among the highest-cost land, labor, capital, electricity, railway freight rates, air freight, corporate and income taxes," wrote SA Aiyer. Modi has to realise that we have to compete with "China and other competitors like Bangladesh, Vietnam, Indonesia and Thailand. They all have lower costs and faster export growth." A few days back founder of Cafe Coffee Day VG Siddhartha committed suicide by drowning because of increasing debt and harassment by tax officials. To that, the Tax officials responded that they were protecting revenue interests. They do not seem to realise that their job is not to resort to terrorism to increase tax revenues for the government but to help the taxpayer pay fair taxes. The previous Congress government asked companies to spend 2% of profits on social causes but this government has not only made it mandatory but has passed an amendment which punishes companies with fines and prison terms for managers. The perversion of forced charity is hard to comprehend. Private hospitals may go bankrupt because they have to serve civil servants almost for free. India's scenario is that elections can be won by pleasing poor people. The government is doing that very efficiently. Until the economy tanks.

Has the long rope turned into a noose?

"In response to the global economic slowdown as well as the generally subdued inflationary pressures, many Asian central banks (India, China, Indonesia, Malaysia, the Philippines, South Korea) have begun to ease monetary policy," wrote Prof RS Rajan. They feel comfortable doing so because the US Federal Reserve just cut its Funds rate by 25 basis points. "Let me be clear -- it's not the beginning of a long series of rate cuts," said Fed Chairman Jerome Powell. He also said, "I didn't say it's just one rate cut." Thus, thoroughly confusing markets, so that "The benchmark S&P 500 index closed down 1.1% for the day. Yields on 2-year notes, a proxy for Fed policy rates, rose to 1.87%." So, what about India? India is not part of the global supply chain and so has been affected little by the trade war between the US and China. Despite three rate cuts our real interest rate is still higher than our peers, rate cuts are not transmitted to lending rates by banks and our real effective exchange rate (REER) of the rupee is too high. The International Monetary Fund (IMF) has predicted a 7% growth rate for 2019, but we need at least 8% growth. Eight out of 16 economic indicators tracked by the Mint are in the red. "All four indicators of the consumer economy -- passenger vehicle sales, tractor sales, two-wheeler sales and domestic air passenger growth -- continue to be in the red for the fifth straight month, with the first three indicators showing a decline (negative growth) over the year ago period," wrote N Kwatra. Consumer confidence has dropped. "The present government has had a very long rope in terms of being able to deliver on the economy. The lack of any coordinated policy response to deal with the current, and perhaps worsening, economic slowdown is affecting future expectations adversely," wrote R Kishore. There is a lack of 'animal spirits' in the economy with "Eight high-frequency indicators compiled by Bloomberg News showed the economy lacked momentum, with the overall activity dot remaining unchanged from a month ago," wrote A Nag. Credit rating agency Crisil listed 5 reasons for the sluggish rate of growth, including rural distress. Economic slowdown has resulted in increased unemployment, wrote Prof Himanshu, with the total number of workers falling from 472.5 million in 2011-12 to 457 million in 2017-18. Jobs have been created in services and in construction, mining and utilities but manufacturing jobs declined by 3.5 million between the two years, wrote Prof S Mehrotra and J Parida. The share of manufacturing in GDP "has remained stuck at 16% since 1991, while the share of employment in manufacturing has stagnated at around 12.5%". Manufacturing cannot increase if people are not buying and people will not buy if there are no jobs. We are going round in a circle.

Brave to take a risk with re-election.

"US President Donald Trump has said he will impose a fresh 10% tariff on another $300 billion of Chinese goods, in a sharp escalation of trade war between the two countries. It came after the latest round of bilateral talks showed little sign of a breakthrough. The new tariffs, due to take effect on 1 September, effectively tax all Chinese imports to the US." "Adding tariffs is definitely not a constructive way to resolve economic and trade frictions, it's not the correct way," said China's Foreign Minister Wang Yi. Those making money from trade with China and stock market brokers are unhappy They say it will raise consumer prices in the US and hurt company profits. The inflation rate came in at 1.65% in June despite a 25% tariff on $250 billion worth of imports from China, when China wanted to renegotiate an agreement reached after weeks of talks between the two nations. The US Federal Reserve has a 2% upper limit on consumer inflation. "US President Donald Trump's trade war with China is backfiring and impacting the US economy, according to his former chief economic adviser." Gary Cohn is a Democrat and used to be president of Goldman Sachs Bank, described as "a great vampire squid wrapped around the face of humanity" by Matt Taibbi, so his views are doubly suspect. Cohn thinks that Trump's tariffs are actually helping China because the Chinese government wants to slow down its economy anyway. If so, why are they bothering to talk? And why are they threatening retaliation when they should be thanking Trump and sending him a present? China's economy is slowing and there may not be enough jobs for its newly qualified university graduates. If China cannot sell its goods in the US, its biggest customer, factories will have to close and people will lose jobs. There have been mass protests in Hong Kong for over 2 months against Chinese rule, but the mainland has not responded to the protests as it did to Tiananmen Square protests in 1989. Not because the Chinese government has suddenly become civilized and human, but because China still needs Hong Kong as a financial gateway. Trading in shares of Chinese companies are restricted on Shanghai and Shenzhen stock exchanges so companies list on Hong Kong exchange to raise money from foreign investors. "China's total corporate, household and government debt rose to 303% of GDP in the first quarter of 2019, from 297% in the same period a year earlier," said the Institute of International Finance.It is now 15% of all global debt. China's wealth is based on blatant theft of intellectual properties of the US, Europe and other countries and its barbaric practice of forcing foreign companies to transfer technology to domestic ones. Donald Trump is to face re-election next year and may lose if the economy loses steam. Still, he is confronting China when all previous presidents have talked big and done nothing. Surely, that makes him a true patriot. 

The magic of helicopter drop.

"India has been pushed to the seventh place in the global GDP rankings in 2018 with the UK and France forging ahead to the fifth and sixth spots, data compiled by the World Bank showed." Apparently, it is because, "In 2017, the rupee appreciated against the dollar, and in 2018 it depreciated against the dollar," said D Pant. But the pound sterling has fallen to $1.21 to one pound today, from $1.35 to one pound in 2017. Despite a falling pound due to total confusion about whether Britain will crash out of Europe without a deal, the British economy retains its spot above ours. Britain runs a trade deficit and imports a quarter of its food from Europe, so a weak pound should have severely impacted its economy. In India, sales of automobiles, including two wheelers, are falling, with market leader Maruti Suzuki suffering a 37% fall in sales of its cars in July, compared to July 2018. Despite almost everyone above the age of 10 years carrying a mobile phone, telecom company Airtel reported the biggest quarterly loss of Rs 28.66 billion in 14 years. People are refusing to spend money and consumer confidence is down. Even sales of FMCG, which are articles of daily use, are not growing. Household savings have declined. "The financial savings of households has also fallen as a percentage of gross domestic product, and the combined borrowing of the Union government, state governments and public sector entities such as the Food Corporation of India is already absorbing almost the entire flow of household financial savings," wrote N Rajadhyaksha. The only thing that seems to be growing is tax collection, with the Goods and Services Tax (GST) squeezing Rs 1.02 trillion out of consumers in July, compared to Rs 968.23 billion a year ago. This is a tax on sales, so how this is increasing when people are reducing their purchases is a mystery. The Prime Minister Narendra Modi wants India to grow to a $5 trillion economy in 5 years by 2024 when he will be up for re-election. Which means a doubling of our GDP in 5 years, or a growth rate of around 15% per year. But, our economy is growing at around 7%, which is also doubtful. A nominal 12% growth rate of GDP assumed in the budget is fanciful, wrote O Goswami. How to stimulate growth? The government has found, what it thinks, is the perfect solution. Helicopter drop of money. By throwing lots of money at farmers, traders and other vote banks it will increase spending, which, in turn, will increase demand so that companies will have to set up new factories, increasing jobs. More social schemes have been announced and taxes and import duties have been increased to pay for them. We will wait for the magic to work.