Raising rates - fighting inflation with both hands tied

    In it's effort to rein in inflation, RBI raised rates for the eleventh time in the last fifteen months. I apologize for the poor quality of the graphs. If you squint a little you will see the trend of rate hikes.

                                          India benchmark Interest rates:

 

Source:tradingeconomics.com

     Here is how inflation has been trending. The rate of inflation has been at hovering above 8 to 9 percent for the last 18 months.

Source:tradingeconomics.com

    Despite recent slowdown in sales of goods like cars, the underlying demand picture in India remains quite robust. Unfortunately, structural problems such as poor infrastructure, antiquated labour laws,lack of investment in agriculture remain stumbling blocks for the supply side in bridging the gap.

    Crude oil which plays a critical role in India's inflation picture has been stubbornly high. Food and commodity prices are largely outside the realm of influence of RBI's monetary policy If the global economic picture remains stable or gets better, monetary policy alone in India would not help tame the inflation. A spirited policy response from the government is urgently needed.

Yeddy makes it to Bloomberg headlines!

And this is all i have to say. For now.

Articles of interest

Here are some interesting reads:

• Using rice husks and solar to power rural India (bloomberg)

• After two decades need for a new wave of reforms (economist.com)

Reform agenda: signs of a heartbeat?

    After having spent the majority of the last few months addressing one scandal after another, UPA-2 seems to be showing some willingness to move the reform agenda forward. There still haven't been any concrete results on the ground.But the news that has been filtering out lately has been promising.

    There has been a steady stream of positive developments on the likelihood of opening FDI in retail. A green regulator is being set up to help smooth environmental clearances to Industry.The rural development minister is promising to table a land acquisition bill.

    For a government mired in endless controversy over corruption charges, a fresh push for reforms could not have come at a better time. UPA-2 might yet do some good before it's term ends in three years.

Articles of interest

 Here are some interesting reads:

• Tax evasion in India (bloomberg)

• Failure to feed India's people (thestar.com)

• Keeping A380 from flying to India (bloomberg)

Tata Nanos and more: prizes to get sterilized

    In controlling birth rates and population growth, sterilization has long been part of public health policy in India. The policy has had it's criticisms. Recently Rajasthan and to some extent Karnataka have taken it a step further. They are offering cars and other rewards as an incentive for people to get sterilized. Some say this another form of coercion.

    The BIMARU states still have very high fertility rates. It will be several decades before they get to a Total Fertility rate(TFR) of 2.1 required for the population to stabilize. For these states, bringing down birth rates is a worthy endeavor. However, providing inducements for people to get sterilized is not a sustainable way to achieve that goal. A sharper focus on improvement of health-care and education coupled with rapid growth in GDP would go a long way. Rising income and educational levels are much more potent in bringing down TFR.

    States in the south achieved a TFR of 2.1 or below a few years ago. They still have grinding poverty. Equitable growth which could bring upward mobility to a wider swathe of the people is needed urgently there.

Opposing FDI in retail - Opportunistic maneuvering

    As prospects of FDI in multi-brand retail have brightened in recent days, BJP has come out in opposition to the reform. Here is their take:

“We will oppose the decision of the government both at the Centre and by the state governments. The decision of the government would not only affect our domestic retail sector but would also destroy domestic manufacture because the foreign companies would be able to buy products from other countries and flood our markets with imported goods made available at these retail chains,” said a senior BJP leader who is among the policy makers in the party.

    This struck me as odd. If memory served me right, NDA was in favour of allowing FDI in retail during their term in Office(1999 to 2004). In April 2004, when they were still in power, this was Finance minister Jaswant Singh:

Dismissing notions that foreign retail brands would dislodge Indian brands from the market, Singh said the NDA was considering only 26 per cent FDI and not handing over the entire retail trade. “The Indian sherbeth is still there despite Coca-Cola and Pepsi. Our experience is that the Indian brand has great strength,” he said.

    It is hard to explain this shift in position. If anything, supply constraints and food wastage seen year after year make the need for reform even more pressing. This just seems to be opposition to a policy for the sake of it.

    This reminds you of their opposition to the Nuclear deal during UPA-1's term in office. Having suffered the electoral debacle in 2009, some would have hoped that BJP and NDA would be a bit more constructive in their opposition to public policy initiatives. Apparently, those lessons have not been learnt. Voters should not overlook this.

Corporate investments - Good news and bad news

    First the good news. Indian companies are growing their overseas businesses at a rapid pace in recent years.

Despite the global economic turmoil, 93 per cent of the Indian mid-sized companies, which do international business, saw growth in revenues from their overseas business, a HSBC survey said here today.
It added that 95 per cent of the companies with global footprint plan to expand their current international business in the next two years. ...

 Interestingly, almost 50 per cent of them have reported that their revenues from abroad have grown faster than domestic revenues in the past 12months.
While 69 per cent of the firms saw their international business growing faster or at the same pace as their domestic business, the report said.

    This is great for both the companies involved and their employees. Apart from establishing new markets for their products, companies and employees gain valuable exposure to international practices and techniques that can be adopted at home. This could also help them compete better with foreign companies in their own backyard.

    Now the bad news. One of the reasons for this outward push is that companies are finding it hard to do business in India.

Here's an economy that's growing at close to 8%—plus a huge market—at a time when the US and Europe are struggling with creaking growth, growing unemployment and rising debt; and yet the buzz across boardrooms is that investing abroad is "at least headache-free". They complain about frustrating delays in government approvals at all levels, primarily those related to land acquisition and the environment.

    At a time when millions of jobs need to be created every year to meet the needs of a growing young population, this is very disappointing. Finding evidence to support Deepak Parekh's claim is not very hard. Land acquisition has been a perennial problem with most large projects, both public and private. There are renewed talks of a land acquisition bill. This could not come soon enough.

    There has been encouraging news about opening up FDI in multi-brand retailing. This needs to be coupled with renewed impetus on infrastructure investments. Society of Indian Automobile Manufacturers (SIAM) is renewing their call for labour reforms.
   
    If India has to pull hundreds of millions of it's citizens out of poverty, it needs to attract investments at much higher rates than being witnessed now. And that cannot be achieved with reforms in a whole raft of sectors.

Got room for another minister in Tihar?

    New details of the Aircel sale and subsequent 2G spectrum allocation are gracing the headlines today. Every new revelation like the ones below highlight the brazenness of the whole affair.

Counsel said “this gentleman [C. Sivasankaran, promoter of Aircel] was forced to transfer all his shares to the Malaysian company. Only after the transfer took place in March 2006, action was taken on all the applications for licence. The Letter of Intent was issued to the Malaysian company in November 2006 and the licence was granted in December 2006.
...

On other aspects of the 2G spectrum case, Counsel said that prima facie the CBI had evidence to show that Loop Telecoms was a front company of Essar, which also stood corporate guarantee for Loop when it applied for a State Bank of India loan.

The status report noted: “Essar was the group behind Loop but two days before the grant of Unified Access Service Licence (UASL) licence they reduced their stake to approx 2 per cent.

    When most of these actions are alleged to have taken place , UPA-1 was still in it's early precarious years. They had several prickly coalition partners to live with. The position of DMK was significantly stronger than it is today. Scandals as big as that of 2G spectrum allocation were unheard of back then. It is plausible that there was a lack of political will on the part of UPA-1 to rein in it's partners at that time.

   The political landscape looks very different now.Despite all their protestations, none of the mainstream parties seem to be ready for fresh parliamentary elections in the wake of all the corruption scandals. In that sense, UPA-2 should feel secure enough for the time being. For a coalition whose credibility is in tatters, this is a chance at some redemption.There could not have been a better time to pursue these charges vigorously.

If Indian states were countries ..

    Click through this graphical presentation from the economist web-site. It provides an excellent comparison of Indian states and territories with countries of comparable size and population.
   
    Be sure to explore the three different tab options, "GDP", "GDP per person" and "Population". Within each tab, click on a state of your choice to see more data. Although India as a whole is one of the 10 countries by GDP, a closer look at individual states and the country each of these states is compared to is deeply illuminating.

Aadhar: Privacy and data security concerns

    Unique Identification Authority of India (UIDAI) has been creating partnerships with existing organizations to speed up the process of enrolling people. As the issuance of Unique Identification numbers(Aadhar numbers) gathers momentum, questions about the scheme's effect on personal privacy and data security have not gone away:

Early last month the Cabinet Committee on Security in a seemingly unrelated move gave partial approval for a Home ministry project, National Intelligence Grid (Natgrid). The development alarmed the privacy advocates to again raise a cry over Aadhaar. Among other things, Natgrid, being run by an ex-army man, Capt Raghu Raman, reportedly seeks to integrate 21 databases -  railways, airlines, stock exchanges, income tax, bank account details, credit card transactions, visa and immigration records, telecom service providers and chemical vendors.

    Fears of big brother taking over people's lives may be overblown. However, concerns around the integrity of the system are warranted. Although biometric data is not part of the system, United states of America has a version of Aadhar, the social security number(SSN).  The SSN of a person can be stolen and misused.
   
    You cannot travel in western europe and the UK for a few seconds without being videotaped by thousands of cameras that are located in every corner. This again is a serious threat to an individual's privacy.
   
    Fears of misuse of personal data and images are legitimate.But the prevalence of abuse has not been so egregious and unchecked that the very existence of such systems in these countries could be questioned. A striking difference between these two examples and that of Aadhar is that the western world has a credible rule of law. Sadly, you cannot always say that about India.
   
    Measures should have been announced and put in place to address this problem prior to issuing Aadhar numbers in a large scale. There has not been much evidence of that.

   Lately, with development of infrastructure we have seen an unfortunate tendency to do things in the reverse order. With regard to privacy and data security concerns, UIDAI may be following the path of that lousy tradition.