Cheap money is of no use if no one wants to borrow.

The Monetary Policy Committee of the Reserve Bank will be meeting today to set policy rates for the next 2 months. The Finance Minister, a lawyer, wants rates to be reduced, just like his predecessor, another lawyer, did in his time. Nothing changes in India, does it? Experts differ in their opinions on whether rates should be reduced, if so by how many points, or kept the same with a softening in bias. Writing for Bloomberg, SK Ghosh argued that retail inflation is down, although core inflation is holding steady, a good monsoon is predicted, food prices are down, the rupee is stronger, so imports are cheaper, and civil service pay rise has not yet been implemented. Reducing inflation by 1% reduces Gross National Product by 6-18%, which is known as the 'sacrifice ratio'. While not asking for a cut he feels that the RBI should soften its stance on inflation. VA Nageswaran has no such qualms. He thinks that the economy is in crisis and growth is dependent solely on government spending and increased iron ore production. He recommends a hefty cut of 50 basis points in policy rate. The RBI should take a deep breath before opting for a rate cut, wrote M Bhusnurmath. The Federal Reserve is due to meet right after the RBI and could raise the Federal Funds Rate. If the RBI reduces policy rate here while the Fed tightens Funds rate there it could result in an outflow of dollars, which will weaken the rupee and immediately increase the cost of imports, especially oil. Anyway, banks are reluctant to lend because their books are loaded with bad loans and deposit growth is falling in public sector banks, wrote Aparna Iyer. A paper from the Bank of International Settlements showed that long term interest rates of emerging nations follow the pattern set by the Fed although short term rates may behave differently. Why all the cacophony? Because GDP growth fell to 6.1% in the fourth quarter of the last financial year. Gross Value Added has fallen to 5.6% from 7.6% in the first quarter. Actually, despite government boasts, GDP growth has declined every quarter, from 7.9% in the first quarter to 7.5% in the second and 7% in the third. Gross Fixed Capital Formation, which means private sector investment, has fallen to 2.4% from 6.5% a year ago. When Harvard economists predicted that demonetisation will impact growth, Modi had taunted them saying "hard work is more powerful than Harvard". Sinha of Emkay Global wrote that growth has fallen more than numbers show because the informal economy has not been fully factored in as yet. So, Harvard was right. Education has some value after all.

Will we be grateful to Pakistan after all?

In a surprise move Saudi Arabia, Egypt, the United Arab Emirates and Bahrain severed diplomatic relations with neighboring Arab state of Qatar, accusing it of providing support to Islamist militants and to Iran. Yemen, Libya and the Maldives joined later. We have to remember that Yemen means the eastern half of the country controlled by the Sunni President Abdrabbuh Mansour Hadi, while the western half, including the capital city of Sanaa, is controlled by the Houthis, a Shia group. Saudi Arabia has been relentlessly bombing Yemen for over 2 years because they suspect that the Houthis are a proxy force for Iran, much like the Hezbollah in Lebanon. Yemen is suffering a severe cholera epidemic. Not surprising that the Houthis promptly declared support for Qatar. Libya likewise is a divided country ever since Muammar Gaddafi's troops were illegally bombed by western powers and Gaddafi was eventually murdered. At the time Egypt and the UAE secretly bombed militants fighting Gaddafi, while Qatar joined the Nato forces against Gaddafi. Qatar has used its oil wealth by investing heavily in western countries while continuing with Islamist policies back home, inviting accusations of being two-faced. The same charge can leveled against the Saudis and the Egyptians. The Saudis have long used their money to build mosques and madrasas all over the world. The Saudis even offered to build 200 mosques, one for every 100 refugees arriving in Germany. The Saudi royal family has been supporting Islamists, as well as jihad against other religions. However, the collapse in the price of oil resulted in massive budget deficits and severely restricted their ability to finance jihad overseas. Attacks by Al Qaeda and Iran's nuclear ambition has frightened the kingdom. The previous king repeatedly requested the US to "cut off head of snake" but Obama signed a nuclear deal with Iran instead. Trump's recent visit and his condemnation of Iran has energized the Saudis. The Muslim Brotherhood, that Qatar is accused of supporting, rose in Egypt where the government accuses Al Azhar university of supporting the Brotherhood. The Maldives government is hanging on to power by suppressing all opposition and arresting people on fake charges. So which side to support, when every country is involved in dirty tricks and it is impossible to distinguish right from wrong. Even Bosnians, who are Muslims, do not want Arabs in there country. A war will definitely happen but who the main actors will be no one knows. Thankfully we have Pakistan between us and Iran, which may be the shield that protects us from the coming war. Who would have thought that?

It is not just one deficit, is it?

Indians are peeved at the credit rating agencies stubbornly refusing to upgrade our sovereign rating despite our economy doing so well. The Chief Economic Adviser accused the ratings agencies of bias
for favouring China, even though its debt to gdp ratio is at 277%, compared to India's at just 67.5%. Our government points to our growth rate of over 7% of GDP, conveniently forgetting that 7% of a $2 trillion economy is much less than 6.7% growth of China's $10 trillion economy, with similar sized population. However, an analysis by Scott and Sam found that China's debt is not as alarming as it looks because most of it is local and backed by huge assets. China's rating was downgraded by Moody's last month. The ratings agencies pushed back, saying that although government debt has decreased from 84.7% of GDP in 2003 to 67.5% in 2016 it is still higher than that of the Bahamas and South Africa, countries with the same credit rating. "We view ongoing central government deficit as supportive of India's credit profile," said Moody's. "However, the recent widening of Indian state deficits has more than offset the narrowing of the central government deficit." Perhaps, out of politeness they do not mention that much of the debt reduction was due to very high retail inflation we suffered between 2006 and 2015. Inflation reduces government debt by increasing tax collections. There are several levels of debt in India. According to the Reserve Bank, the fiscal deficit of our states has increased to 3.2%, instead of coming down to 2.6%. To raise money states are selling bonds at huge premium of 100 basis points above yields on sovereign bonds. The Central government has pledged to compensate states for any shortfall in revenues due to the impending Goods and Services Tax, so it remains to be seen whether the government can keep fiscal deficit at 3%, as they are promising. More than a third of indirect taxes are not being included in the GST. States could increase taxes on these products. leading to inflation, or a fall in sales, leading to lower tax collections. Another level of debt is in our banks, which are sitting on massive amounts of bad loans. Banks are warning the government that over a trillion rupees worth of loans to telecom companies are at risk. This is due to deep price cuts by Reliance Jio, a new company launched last year. With a billion mobile connections surely no telecom company will default on its debt? Reliance Communications, or RCom, has just defaulted on its debt of $7 billion. RCom's credit rating has been junked. We should be careful before getting angry.

Educating children vital to enjoying retirement.

Asia, which has been the fastest growing region of the world in recent decades, is going to face declining growth, with an ageing population, as has already happened in Western countries, wrote  Prof Indira Rajaraman. Not just the West, fertility rate in Japan dropped has dropped to a record 1.4 per woman. This is the 36th year in a row that the number of children has declined, last year it shrank 170,000. Fertility in many countries has fallen to below the replacement level of 2.1 per woman. "India, Indonesia and the Philippines will be the last to cross over from working age domination, and are the three countries still poised to reap the demographic dividend of a young age structure." Fertility rate in India is still above replacement level and is expected to get there by 2020. By 2030, India will overtake China to be the most populous nation on earth. An increasing population means more young people looking for jobs. "The problem of declining rate of output growth, and the declining employment generated by that growth, is now a global phenomenon." Naturally, with a vast population, even with declining fertility rates, India is facing a jobs crisis. The World Bank predicts that 69% of manufacturing jobs will be lost due to automation, so the emphasis has to shift to services. Unfortunately, over 80% of engineers are not fit to be employed. "Automation is an irreversible reality set to grow everywhere, which leaves the whole world having to scramble to find service sector employment for new entrants to the labour force. Service sectors are resistant to automation, more so than manufacturing processes." One sector which could create a lot of employment while saving vast amounts of money is food processing. Around 40% of food is wasted even before it reaches consumers. We need to have clean silos to store grains, cold stores to store fruits and vegetables and a swift transport system to get the produce from areas of excess production to areas of consumption. That will need land, continuous electricity supply and a removal of bottlenecks at state borders. To keep up with the fast changing technology the education system has to evolve quickly to keep up with the world. Without a good school education children will never reach that far. Large number of people will be required to look after rising numbers of old people. A lot of the work will be in general assistance, such as helping the aged to get around, helping them with food and supervising medicine intake. That will need money. Most retired people in India do not have enough money to survive and India is ranked last in care for the elderly. Prof Rajaraman has good ideas but implementation is in the hands of politicians. Not encouraging.

Everyone lies on Facebook, how do you hide your fingerprints?

Mishi Choudhary and Prof Eben Moglen write about "digital colonialism" of internet companies, such as Google, Facebook and Amazon. "Billions of people provide data about their personal lives and business activities to these companies, which are using that data as leverage to change human behaviour to their economic advantage. Governments everywhere see them as rivals to their power and also invaluable allies. India and its government too face immense challenges, but also an extraordinary opportunity, if GOI can lead India in the right direction." Europe spends vast sums of money investigating and litigating against these companies. India can show a better way. "Indian industries, providing state-of-the-art cloud services - social networking, email, travel, calendaring, on-line retailing everywhere, etc - could very profitably, given Indian cost structures, compete to provide those services to everyone in the world who has seen the error of 'free' services based on privacy invasion, and wants an alternative she can pay for, with confidence in the privacy technology that is all open source, and works in their interest rather than someone  else's." Pious thoughts. But what about the government? We can avoid using Facebook or Amazon, and a majority of people lie on Facebook. WhatsApp is encrypted end-to-end, which means that no one, not even the company itself, can read our messages. UK Home Secretary, Amber Rudd accused the company of helping terrorists. Governments demand that companies leave a backdoor which they can use to spy on citizens but companies say that cyber criminals will quickly find such a vulnerability. Apple CEO. Tim Cook called backdoors "the software equivalent of cancer". While we can defend ourselves against private companies we are totally helpless against the might of the state, which is defined as a centralized government that maintains a monopoly of the legitimate use of force within a certain territory. The Indian government is enforcing compulsory use of biometric identity number for legitimate business, including filing tax returns and the Attorney General argued in front of the Supreme Court that Indians have no right to privacy. Companies  change consumer behavior through advertising and there is nothing to stop them doing population surveys. Companies try to lure us to spend, politicians want to subjugate us. About biometric identity cards the same Prof Eben Moglen wrote in April,"If government does not have a positive responsibility to protect the privacy of the citizens, including against itself, then the technologies of behaviour collection now being grafted into the nervous system of humanity we call the internet will make new, hyper-efficient modes of despotism inevitable." Precisely. Already happening in India.

Excellence is unique, not a brand.

"Can India build 20 Harvards in 20 years?" asks an editorial in the Mint. It is probably a figure of speech, meaning centers of excellence which will be ranked among the top universities of the world. Not one Indian university figures in the top 200 in the world, though we have 31 in the top 800. Trouble is that our politicians think that excellence comes from a brand and lots of institutions bearing the same brand will be equally good. Thus, there were 5 branches of the Indian Institute of Technology, but now there are 23. There was just one All India Institute of Medical Sciences, now there are at least 7, with plans to build more. They do not understand that universities are not consumer products, where a basket of products is sold under one brand. That is why companies spend huge amounts building brand equity. At the root of brand equity is trust -- that any product bearing the company's name will be good. A university cannot be made in a factory. It must have good teachers, top quality laboratories, libraries and research publications in quality journals. And it takes time. That is why there is only one Harvard, one Cambridge and one MIT. The top universities are completely autonomous, appoint their teachers and choose their students without interference from politicians. Harvard has an endowment of $32.7 billion, equivalent to Rs 2.2 trillion. Maybe, that is why job offers are shrinking for IIT graduates. China understood that excellence does not come from names. It merged small universities into larger ones and spent $2.56 billion on the top 11 universities in the first phase. "By 2003, China's share of Asian science and engineering articles had increased from 14.54% in 1998 to 22.43%; its number of undergraduate and graduate students had been growing approximately 30% per year since 1999; and by 2008, it was already churning out the largest number of PhDs in the world,...." In India,"Between 1950 and 2014, the number of universities has increased 34 times, from 20 to 677, while the number of colleges has increased 74 times, from 500 to 37,204..." "Unfortunately, a vast number of these institutions are little more than rubber stamps on degree certificates..." In short, they are cheating desperate students. To be top class universities need the best students from top quality schools. Only 39% of the poorest fifth of the children attend secondary school and 23% attend higher secondary education. Strangely, just 31% of the richest fifth of our students attend college. Why? Over 70% of children have failed Class XII board exams, 3 children committed suicide. What use is brand if you fail in school?

Vultures cannot harm a strong economy.

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

Exuberance maybe irrational but could still be right.

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

Can we be a little bit digital?

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

Enjoy while it lasts. Who knows the future?

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

Is the IMF forecast just whistling in the wind?

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

If humans cannot hack it AI surely will.

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

Saving water while producing power.

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

Strong rupee: best time for a holiday abroad.

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

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

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

Saudis are hoping to trump Iran.

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

OBOR and terrorists, will be fun to watch.

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

Productivity or populism, a difficult choice.

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

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

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

Credit rating is actually a rating of trust.

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