Inflation in India: what about behavioural economics?

Inflation in India is not coming down despite all brain-scratching and actions by India's topmost official economists and the Reserve Bank of India. All their projections on inflation have fallen flat, and this is happening for the last two years. They keep guessing if a good monsoon would bring it down, or a tight monetary policy would. Government's efforts to reduce fiscal deficit have failed due to their and state governments' profligacy. Even if they have been able to contain fisc to some extent, it is not showing up in inflation figures. A general thinking that rationalises high inflation is that the above 8% growth is leading to inflation. Inshallah, if we believe in such trade off between inflation and growth, the growth will soon go down below 8%.

No doubt, inflation/ price rise is a complex problem, linked to a hundred things many of which are not in government control and many have origin outside India. But rationalising inflation would not do. We must find an answer. It appears that the government and its economists are going by the rule book, and this precisely could be the main reason for the problem. In complex economic situations, you need to find new solutions. For that you need to think out of box.

I am not suggesting that I have the solution. But let me give one example of what the governmental economists might be missing when they are looking for [obvious] solutions. Has someone in the government thought of the population is humans? Have they applied what is called behavioural economics also to see why inflation is on the rise? Has some economist analysed how the consumerist society is pushing up demand of items that do not generate wealth in real sense? Has somebody tried to link the circulation of huge unaccounted money with inflation?

Will somebody give the government the correct diagnosis and the government administer the right medicine? If not, the economists will do the accounting based on the books they have read, and will keep telling you why they could not control inflation/ price rise [and other ills of Indian economy].

Union Budget 2011-12 highlights

For record, I am giving below the main highlights of the budget presented by Pranab Mukherjee on 28th Feb 2011:

• Direct Tax Code (DTC) to be effective from April 01, 2012.
• Five-fold strategy to deal with black money. Group of Ministers to suggest ways for tackling corruption.
• Phased move towards direct transfer cash subsidy to BPL people for better delivery of kerosene, LPG and fertilizers.
• Additional banking license to private sector players proposed.
• Rs.6000 crore to be provided for maintaining minimum Tier I Capital to Risk Weighted Asset Ratio (CRAR) of 8% in public sector banks.
• Rs.500 crore to be provided to regional rural banks to maintain 9% CRAR.
• Rs.40,000 crore to be raised through disinvestment.
• FDI policy to be liberalized further.
• SEBI registered mutual funds permitted to accept subscription from foreign investors.
• FII limit for investment in corporate bonds in infrastructure sector raised.
• India Microfinance Equity Fund of Rs.100 crore to be created by SIDBI.
• Rs. 500 crore Women SHG Development Fund to be created.
• MSME get boost as Rs. 5000 crore provided to SIDBI and Rs.3000 crore to NABARD.
• Interest subvention for housing loans up to Rs 15 lakh, for houses up to Rs.25 lakh.
• Allocation under Rashtirya Krishi Vikas yojna (RKVY) increased to Rs.7860 crore
• Allocation of Rs.300 crore to promote 60000 pulses villages in rainfed areas.
• Rs. 300 crore vegetable initiative to achieve competitive prices.
• Rs.300 crore to promote higher production of nutri-cereals.
• Rs.300 crore to promote animal based protein supplements.
• Rs.300 crore Accelerated Fodder Development Programme to benefit farmers in 25000 villages.
• Credit flow target to farmers raised from Rs.3,75,000 crore to Rs.4,75,000 crore.
• Crop loans to get interest subvention of 3% from 2% at present.
• National food security bill to be introduced this year.
• Capital investment in storage capacity to be eligible for viability gap funding.
• 23.3% increase in allocation for infrastructure.
• Tax-free bonds of Rs.30,000 crore proposed by government undertakings.
• Environmental concerns relating to infrastructure projects to be considered by Group of Ministers.
• National Mission for Hybrid and Electric Vehicles to be launched.
• 7 Mega clusters for leather products to be set up.
• Allocation for social sector increased by 17% .
• Bharat Nirman allocation raised by Rs.10,000 crore.
• Rural broadband connectivity to all 2.5 lakh panchayats in three years.
• Increase in remuneration of Angawadi workers and helpers.
• Allocation for education increased by24%. Rs.21,000 crore allocated for Sarv Shikshya Abhiyan registering an increase of 40%.
• 1500 institutes of higher learning to be connected with Knowledge Knowledge Network.
• National Innovation Council set up. Additional Rs.500 crore for National Skill Development Fund.
• Plan allocation for health stepped up by20%.
• Indira Gandhi National Old Age Pension Scheme liberalized further.
• Rs.200 crore for Green India Mission.
• Rs.200 crore for cleaning of rivers.
• Rs.8000 crore provided for development needs of J&K.
• 10 lakhs Aadhaar (UID) numbers to be generated everyday from 1st October.
• Fiscal deficit targeted at 4.6% of GDP.
• Income Tax exemption limit for general category individual tax payers enhanced from Rs.1,60,000 to Rs.1,80,000.
• Qualifying age for senior citizens lowered to 60; senior citizen above 80 years to pay no income tax for income up to Rs.5,00,000.
• Surcharge on corporates lowered to 5%

Mamta's rail budget: populist - yes; 'people friendly' - doubtful; 'railways friendly' - no

Mamta Banerji's rail budget was expected to be populist and it is. No hike in fares and freight. In fact, in this age of high inflation, this dose of populism is welcome. Somehow, she has been more pan-Indian this time, and has been rather fair in allotting factories etc to other parts of the country than Bengal. Singur and Rae Bareli cannot be faulted too much. But she should also have been a bit more like a CEO; railways is after all a business concern.

Where Mamta is failing repeatedly is running railways like a leading business concern. It must be run that way,  or it will fail to shoulder its social responsibility as the largest and low-cost carrier of people across the country and economic responsibility as the largest frieght mover. The promises of last budget remain unfulfilled, and this budget does promise too much. India News Today feels that there are not enough finances, will or capacity with the railways to complete the numerous projects Mamta announced today.

Rail safety gets lip service as always and accidents do happen with higher death rates; passenger amenities at railway stations remain as bad; there is hardly any plan to tackle huge summer and festival rush; the scenes of thousands travelling on roof-top and bulging out of train doors will increase rather than lessen; touts will loot passengers as always, under the nose of top officers; the poor who travel in second class will continue to be treated like third-class citizens; pilferage, bribe-seeking and outright thefts of goods will continue to happen and so will the numerous ways of short-changing honest passengers, businesses and railways by rail staff and their accomplices.

If Mamta were really serious about making railways 'people friendly, she should have at least made the reservation system transparent and tweak services. It will not cost much but will generate more income for railways - the money going into cheats' and unscrupulous contractors' / vendors' pockets would go into railways' coffers.

Pl click here for India News Today's highlights of the railway budget and Mamta's quotes.

Rail Budget 2011-12: highlights

For record, I am giving some major highlights of the Rail Budget presented by Mamta Banerji today [25th February, 2011]:

Mamta Banerji

• No hike in passenger fare and freight rates.
• Plan outlay of Rs. 57,630 crore proposed.
• Rs. 9,583 crore provided for new lines.
• 1300 km new lines, 867 km doubling of lines and 1017 km gauge conversion targeted in 2011-12.
• Bridge Factory in J&K; Diesel Locomotive Centre in Manipur. Centre of Excellence in Software at Darjeeling; Rail Industrial Parks at Jellingham and New Bongaigaon [West Bengal]; 700 MW gas-based power plant at Thakurli in Maharashtra.
• 56 new Express Trains, 3 new Shatabdis and 9 Duronto trains to be introduced.
• AC Double Decker service on Jaipur-Delhi and Ahmedabad-Mumbai routes.
• New Super AC Class to be introduced.
• A new portal for e-ticketing to be launched.  Booking charges: Rs. 10 for AC classes and Rs.5 for others.
• Pan-India multi-purpose smart card “Go India” to be introduced.
• 236 more stations to be upgraded.
• 2 new passenger terminals in Kerala and one each in Uttar Pradesh and West Bengal.
• Feasibility study to raise speed of passenger trains to 160-200 kmph.
• Anti Collision Devise (ACD) sanctioned to cover 8 zonal railways.
• GPS Based ‘Fog Safe’ device to be deployed.
• All state capitals in the North-East except Sikkim to be connected by rail in next 7 years.
• 18,000 Wagons to be procured during 2011-12.
• A scheme for socially desirable projects, ‘Pradhan Mantri Rail Vikas Yojana’  proposed.
• 10,000 shelter units proposed for track side dwellers in Mumbai, Sealdah, Siliguri, Tiruchirapalli on pilot basis.
• Concession to physically handicapped persons to be extended on Rajdhani and Shatabdi trains.
• Freight loading of 993 MT and passenger growth of 6.4 % estimated for 2011-12.

Quote-unquote

We have taken a two-point approach ... on the one hand by sustainable, efficient and rapidly growing Indian Railways, and on the other, by an acute sense of social responsibility towards the common people of this nation.... Mamta Banerji while presenting the rail budget

 Pl click here for India News Today's quick take on rail budget.

Highlights of the economic survey 2010-11

For the sake of record, I am giving below some of the highlights of Economic Survey 2010 – 11. presented in Parliament on 25th February, 2022:

• The economy us expected to grow at 8.6% in 2010-11 and 9 per cent in next fiscal.
• Economic fundamentals: strong with savings and investments up, exports rising rapidly and inflation falling.
• Growth has been broad-based with rebound in agriculture, continued momentum in manufacturing and private services.
• Agriculture is likely to grow at 5.4% in 2010-11.
• Industrial output grows by 8.6% ; manufacturing sector registers 9.1% growth.
• Exports in April-December 2010 are up by 29.5 %.
• Imports in April – December 2010 are up by 19%.
• Trade gap has narrowed to US $ 82.01 bn in April-December 2010.
• Net Bank Credit rises 59%/
• Social programme spending has been stepped up by 5% of GDP over the past 5 years.
• 9.7% growth of GDP achieved [at market prices].
• Inflation is expected to be 1.5% higher than what it would be 'if we were not on growth turnpike'.
• Production of foodgrains us estimated at 232.1 mt.
• Forex reserves are estimated at $297.3 bn.
• Gross Fiscal Deficit stands at 4.8% of GDP down from 6.3% last year.

India's human development: 119 too low

Without any comments, I am giving below some statistics about India's ranking in the Human Development Index [HDI] announced by the UNDP yesterday:

India ranks 119. Some other countries' ranks are as follows:
Norway 1
Australia 2
New Zealand 3
USA 4
Russia 69
Brazil 73
China 89
Sri Lanka 91
Pakistan 125
Bangladesh 129
Nepal 138
As per the Human Development Report, new tools have been used to arrive at HDI rankings this time. 'In this Report we introduce three measures to the Report family of indices—the Inequality-adjusted Human Development Index, the Gender Inequality Index and the Multidimensional Poverty Index. These state-of-the-art measures incorporate recent advances in theory and measurement and support the centrality of inequality and poverty in the human development framework.'

India's figures for key indicators of human development are:
life expectancy in years: 64.352
Mean years of schooling in adults: 4.399
Per capita yearly income [after parity] $3337.366
Inequality adjusted HDI: 0.365 [maximum: Norway: 0.876]
Intensity of deprivation: 53.5
Gender inequality index: 0.721 [minimum: Norway: 0.234]
Adjusted net saving: 24.2%
Robberies per lakh population: 1.6
HDI value: 0.519 [world: 0.624, maximum: Norway: 0.938, India in 2009: 0.512]

raising support prices of crops

For those who don’t know what food procurement and support prices mean in Indian context, this is a small primer.

India grows about 225 million tonnes of food grains and government agencies procure about 50 million tonnes of it from farmers in the harvesting season. Most of the grain so procured [mostly wheat and rice] is channelized into the state-run Public Distribution System or the rationing network.

Every year, the Union Government announces ‘support prices’ for main crops for the next season. Support price is the price at which the government commits to buy that commodity from the farmer if the market price goes below that, so that the farmer is assured of a minimum return. So, for the coming season [November-March], wheat, mustard, safflower, lentil and gram support prices have been announced. In practice, the support price does not remain a price to be paid during distress, as the procurement agencies are asked to proactively garner as much grain as they can.

Food Corporation of India is the coordinating agency for food grain procurement, storage, movement and disposal of stored grain. FCI, procurement agencies of different states and some cooperative giants carry out the actual procurement at major food grain markets and by putting up procurement centres in important production centres.

Over the years, the support prices of all crops have been raised substantially. A Commission on Agricultural Costs and Prices [CACP] comes out with the support prices based on a complex calculation to account for the cost of cultivation, profit margin, inflation etc, and the government tops it with some more for political reasons.

Government uses the support price also for giving cropping guidance – this year, the support price of wheat has been raised modestly from Rs. 1100 per quintal to Rs. 1120, while that for gram has been raised from Rs. 1760/q to Rs. 2100/q and that for mustard from Rs. 1830/q to Rs. 1850/q. Since India imports large quantities of gram and other pulses [and these are very important for nutrition security as India is predominantly a vegetarian nation], the government’s encouragement to farmers to grow pulses is understandable.

On the other hand, constantly raising food grain support prices leads to rise in food grain prices for bulk consumers such as mills and retail consumers. India’s food inflation presently stands at over 15.5% per year, and it is at least partly due to rise in support prices.

Economists, agriculturists and consumer groups, all criticise the system of support prices on one count or the other – mostly counter to each other’s points of view. But the system continues. It breeds lots of corruption, wastage and inefficiency in food trade. It also does not allow fair price discovery for farmers. The country ends up paying huge subsidies for procurement and storage. The country also loses a good deal of foreign exchange as it cannot sell surplus food grain when the global prices are high, due to political sentiment attached with food security.

In fact, India’s procurement will rise further if the government comes out with the Food Security Act [guaranteeing food grains to all, as a matter of right] – this is the promise the Congress made during the last general elections.

hunger, India and Bharat

The latest global hunger index brought out by International Food Policy Research Institute is holding mirror before us once again. It has put India at 67th position among 84 nations it studied and ranked for hunger. [It has not ranked highly developed countries and those getting very low hunger incidence.] India’s position is higher [=worse] than its neighbouring nations in the South Asia [except Bangla Desh] and is equal to strife-torn Darfur and the closed communist country North Korea.

Earlier, the World Human Development Report showed us the mirror.

The IFPRI Global Hunger Index takes into account proportion of malnourished people in the population, underweight children in the age group 0-5 years and child mortality in this age group.

I will not discuss the reasons of such a poor performance by India, but juxtapose it with some other realities of India:

• India has been growing at the rate of 8-9% per year year after year for many years and is likely to grow at over 9.5% this year.
• India is commended for its handling of global recession, and is at present one of the fastest economies in the world.
• The number of Indian millionaires and billionaires in global list is going up year after year.
• India can boast of flashy infrastructure built in recent years with public money: a dozen ultra-modern airports, numerous flyovers without consideration for long-term traffic, expensive government buildings. Add to it the glossy high-rise glass towers and elite residential townships developed by the private sector. Only yesterday, papers talked about the newly built ‘house’ for Mukesh Ambani that has two roof-top helipads and closed parking space for 160 cars! Today, the papers talk of over 150 Mercs being sold in Aurangabad in one lot!
  
• India spent huge sums on Commonwealth Games – directly and indirectly, making it among the costliest games if you consider $-Re price parity and the quality and future utility of the infrastructure created.
• The consumption of cars, consumer durables and high-end fashion items is on the rise in India. India is supposed to be the world’s biggest free market.
• The turnover of Indian stock and commodities markets, though small by western standards, runs into thousands of billion rupees a day.
• India is craving for a permanent seat in the Security Council and is a member of G-20.
• India runs some of the world’s biggest welfare schemes: Sarva Shiksha Abhiyan for elementary education, Integrated Child Development Scheme [ICDS] for child development, and the recent Mahatma Gandhi National Rural Employment Guarantee Scheme [MNREGA] and National Rural Health Mission. India has had the world’s largest family planning programme and has been running numerous schemes for maternal health, promotion of girl child, poverty alleviation, housing and what not.
• The gender ratio is unfavourable to women in most parts of the country.
• India has huge granaries, world’s biggest food grain procurement system, and the largest ration system [Public Distribution System] – all in the government sector. Government agencies also waste huge quantities of food grain because of corruption and poor storage facility.

guest talk: rise and rise of SENSEX*

Sensex is not giving any signs of correcting. In the last… it has jumped from to over 18000. This has enthused bulls into forecasting that it will soon reach 25000. It will one day, but soon?
Let us just list the main reasons why the sensex must correct sooner than many forecasts to more reasonable levels, in conformity with corporate earning, and domestic and global economic expectations.

Inflation has not come down with all the steps taken so far. So, inflation is a big worry for the government: RBI is likely to take some tough decision in its next policy review.

Growth is OK, but the core growth is not that great. Moreover, growth figures often gets spruced up falsely due to base effect as last year was a depressing year. If tough monetary decisions are taken, growth will be impacted further.

Infrastructure is as poor as ever, and government is showing no great commitment to support it in a big way. There are massive slippages in all major physical and financial plan targets.
Policy scenario is not very enthusiastic. See the way the government treated Reliance over D6 oil and is now handling Cairn-Vedanta deal. There is a threat dished out to captive coal mines. Environmental and local issues and land politics are weighing heavy on natural resource based industries. Outsourcing ban in the US might prompt the stressed European economies also to do the same and it will hurt IT and services sectors badly. For no good reason, the government has cancelled L&T shipping foray. The feelers are that the domestic private sector’s role in nuclear energy will be kept low. Many more such examples show government’s unclear policy stand and confusion, and also unfavourable environment for industries.

Internationally, US and European economies are strutting along with government support and the green shoots are few and far away. Governments and private sector have become very cautious and risk-averse.

A lot of foreign money is flowing into India, and this is not always a good thing. Most of this inflow is hot money on which you cannot depend for economic growth. Highly suspect also for volatility in stock markets.

So, at macro level, we do not see reason to rejoice too much. Investors need to be cautious and reduce their investments whenever their specific stocks seem to be fully priced. The market will sure give an opportunity to invest at lower rates in very near future.

*: by friend K. Kaura, an investor who has made good money on the bourses.

food rot, supreme court and a government sitting cosy

Media had developed fatigue over the issue of rotting foodgrains and people at large had turned cynical. But when the Supreme Court barked yesterday, the issue has again become alive.

Things and the way the government functions have not changed over years; they did not change since I wrote this post a month ago. They are not supposed to change from today.


It is not the role of the Supreme Court to run the country, it is for the government to do so. But when the government does not do the right things and in the right way, the cout intervenes. When the government does not even provide correct figures of foodgrain damage, the court appoints its own team. When the court issues an order [can see the wordings here], the minister says, they are not bound by the order since it is in the form of a suggestion. Now the court snubs the minister and opposition raises a hue and cry in parliament, but what happens?

I'll tell you. There will seem to be some action: some statement from the government side on what it has been and will be doing. Some action against lower-level FCI officials. A letter to States, an all-India level meeting, a monitoring committee, new guidelines on storage, Sonia's NAC will meet and discuss Food Security Bill and advise the government, the Group of Ministers will take a marginal decision... The Centre and states will blame each other. There will be hardly any silos when the next crop comes in about a month and even if storage capacity is increased [as claimed], food will continue to be stored unscientifically. On a larger horizon, agriculturists and companies depending on farm produce will keep making their decisions based on guesswork in absence of a policy guidance. Enormous sums will keep getting wasted on unnecessary subsidy, grain damage, transportation and so on. Country would not benefit from export of grains at high international prices. Private investment will hesitate to come into the farm sector...

What I am saying is not a gross generalisation and frustration with the system. I will soon give you the statistics and bare facts to enable you to see for yourself the rot in the system.

direct tax code: main features

The Direct Tax Code was presented in parliament on 30th August 2010. Even after its becoming an act of law, it will be put into operation only from 1st April 2012. Some of the main provisions of the Code, as it stands now, are given below:

Income tax slabs for individuals:

• Up to Rs. 200,000 – no tax
• Rs. 200,000 – 500,000 – 10%
• Rs. 500,000 – 1000,000 – 20%
• Above Rs. 1000,000 – 30%
• No surcharge or cess over and above the tax.
• No special slab for women; no tax up to Rs. 250,000 for senior citizens

Deductions allowed for individuals:

• Up to Rs. 100,000 in specified savings such as provident fund and NSC
• Up to Rs. 50,000 in respect of expenditure on children’s schooling, health insurance premium, medical reimbursement etc
• 
  
• Up to Rs. 150,000 in respect of interest on house loan for self-occupied property; pre-construction interest deductible
• Standard deduction for income from house: 20%
• No deduction for instalments paid for repayment of housing loan

Other important provisions for individuals:

• No tax on interest earned on PF deposits.
• No tax on receipts from new pension scheme, annuity schemes, pure life insurance schemes
• No capital gain tax on shares held for over one year and for which STT has been paid
• Short term gain on shares [held for up to one year] are given deduction of 50% and then taxed at 5, 10 and 15%as per relevant slab
• Holding period for classification as long term reduced to 12 months

Corporate tax:

• 30% for domestic and foreign companies; no surcharge or cess.
• Minimum alternate tax [MAT] at 20% on book profits
• Certain tax benefits are allowed to SEZs
• Wealth tax introduced for companies
• Tax audit limits enhanced
• More regulatory powers and new rules for taxation of foreign subsidiary, cross-border transactions, investment abroad, etc

My comments on the Code can be seen here.

the direct tax code: mere tinkering with tax provisions

India will soon have a new tax law, one with fewer exemptions and lower tax rates. It is called the Direct Tax Code.

The Direct Tax Code in its present form brings in hardly any substantial reform to the Indian tax system as was expected.

With numerous exemptions and provisos, the Indian tax law has become highly convoluted and unfriendly, and also prone to tax evasion. It was expected that the Direct Tax Code would provide a tax-payer friendly, straight and simple tax regime. However, the Code, as placed in the form of a bill in parliament, goes hardly beyond what can be achieved during the annual budget exercise.

The draft Direct Tax Code will now be debated in parliament and will become a law, which will be implemented only from 2012. The government says, we have given time for tax lawyers to study it, the international economic scenario is not yet stable, etc but the fact is that the government was not itself ready to implement it from the next financial year. There may yet be some changes in the Code till it is finally enacted, but you can't expect much: we are talking about reform, not playing with some exemption here or some limit there. We have missed a big opportunity to reform the direct tax system. The positive sentiment created over the last many months in favour of reforms has been wasted.

Who is the gainer? Not the taxpayer or the government, but those interested in status quo.

Main features of the Code can be seen here

the land acquisition and compensation game

These days, farmers in areas around big cities do not seem to be bothering about weather, fertilizers, seed, labour etc. They are busy praying and lobbying that their land be acquired by the government and they are paid enormous sums. There are dharnas and roadblocks by 'farmers' in many parts of the country on any given day.

Think of 'farmers' around Delhi. Till the British shifted India's capital from Calcutta to Delhi and till years later, small farmers of this area could hardly grow crops enough to meet their own requirement. Many shifted to Delhi as the city grew and provided employment and civic amenities not available in villages. When the city grew beyond the core area, then into neighbouring states, they suddenly found their land in huge demand from government and private builders. Many of them must have been hoodwinked by smart operators and fleeced by government babus. Some might have died waiting for the  promised gold.

But then there is a huge army of 'farmers' of all sizes who smell mountains of gold in their land. A paper recently reported that in a slum colony in Mumbai, hutment owners first got 50 lakh [five million] bucks, the ones who waited for a few months were offered 70 to 80 lakh and some are not selling their huts waiting for the price to reach one crore  [10 million] rupees. These 'farmers' are in the same league. They keep on getting higher and higher amounts for the land they sell.

The issue of land sale becomes emotional when governments try to acquire land. 'Farmers' come out in hordes, their associations converge, local and national-level political leaders and parties come in their support. They are presented as victims in the hand of a government that sells the intersts of poor people and farmers to big industrialists.

The government, who had even got a promise earlier from these 'farmers' for agreeing for a particular rate of compensation, suddenly finds the farmers asking for big jump in compensation. If the government does not agree to such demands, besides protests, they go to the court. So the harried government bows before them.
I am not saying, the govenrment functionaries are all the time honest and acquiring the land without any personal interest in mind. In more cases than one would like to believe, there is some politician or bureaucrat involved in favouring a businessman with the project that will come up on the acquired land. Many a times, criminals and professional landgrabbers could be favored in the garb of a project meant for public good.

However, the tyranny of the 'farmers' too needs to be denounced. These are landed people bent on making enoromous quick buck; they are not farmers. Real farmers are finding difficult to make decent earnings if they do not have big tracts of fertile land.

depressing talk just to depress the world?

A company called Ideas First has been inserting advertisements in major dailies. One of their main articles is: world economic problems - mountain being made out of molehill.

In simple economic terms, this advt tries to argue that the world is not going to crumble the way economic doomsayers throughout the world are predicting. Some points are worth noticing:

• There is no problem of liquidity: liquidity is there in the system because the world is saving a lot. It is there whether or not central banks are creating liquidity.
• Present EU problems will not hurt because they [and the world] are prepared in advance to handle them. It is not like the East Asian countries a decade back, where a bubble was allowed to bloat and then it burst suddenly.
• Financial gurus are focussing on negatives and predicting a doom while in the past they have not been able to predict recession. So it is just gloom talk.
• Who is right, the financial gurus [who are critical of countries that are printing money to raise liquidity] or the rating agencies [who give these very countries a stable rating]? Both can't be correct.

Their detailed paper is available here.

NREGA – a rule changer on the rural scene

The ‘rights centred’ approach that the previous UPA government experimented with, with national rural employment guarantee act, has led to an economic and social transformation of sort. Implementation of the schemes following this Act [NREGS] leaves much to be desired, but without doubt the scheme has -

• Flushed enormous funds into rural and semi-urban areas;
• Brought employment to people near their homes and thus substantially reduced seasonal or perennial migration to big cities;
• Made the unorganised labour more assertive in demanding wages for the work done whether under NREGS or otherwise;
• Reduced the cost competitiveness and profit of enterprises that depend on cheap labour;
• Increased the purchasing power of the rural poor and thus empowered them in various ways;
• Created more demand for goods in rural areas, creating more jobs indirectly; and
• Created all sorts of pits and mounds and sometimes useful assets such as bridges, river embankments and reservoirs.

Wherever the real poor are getting employment for a good part of the year, fair wages and subsidised food from the Public Distribution System [PDS], the newfound security has the potential of eradicating poverty in a short time. The money the family earns should remove the compulsion to put children on menial jobs and give a sense of security that can spur savings. Theoretically, it would lead to lesser malnutrition and ailments, children going to school, women looking after themselves better, less indebtedness and less dispossession of land needed for repayment of loans. In practice, there are many many gaps. But we are not talking right now about implementation.

On the negative side, because of the money that is flowing into villages and small towns, new forms of tension are rising. There are many fake wage earners, and a good number of genuine poor are denied work due to caste or other considerations leading to disenchantment among those denied jobs. A part of the money that is coming ‘cheap’ to the household is getting diverted to country-made liquor shops. Contracts for various types of work are cornered by the progeny of village heads, revenue clerk etc who are emerging as the new generation of strongmen. While the wage earners are learning to raise their voice, these new youth with easy money are intolerant of such ‘rebellion’ by the erstwhile oppressed people. Though no documentation or proof of this is still available, this new money must be generating a new breed of thieves and brigands in villages.

It is also reported from many parts of the country that labour for farming is becoming scarce due to NREGS. In some places, labourers have started sort of blackmailing when they find that the job is critical [like paddy transplantation and crop harvesting] and no other labour is available.

An economic intervention of this type is always prone to have negative side effects, but let’s hail it. After the Integrated Rural Development Programmes [IRDP] that ran in the earlier two decades, this is the largest scheme the government ever started for the rural poor. It is better in at least two respects - one, it lands money directly in the hands of the poor, and two – it gives a sort of job security to the poor.

We’ll talk about implementation sometime later.

hiding behind growth figures to explain inflation, mr. finance minister?

Finance Minister of India, Mr. Pranab Mukherjee, yesterday said in parliament: "There is no question that the strong recovery, desirable as it is, has contributed to an acceleration of prices.” He explained it and it was convincing.

But Mr. Mukherjee, what you said is part of the story and it is so when we are talking about inflation as it is measured by statisticians and analysed by economists. Price rise is something that affects humans who use money to buy things. You and your colleagues and your spin masters have been blaming the present price rise on last year’s poor monsoon rains, rising consumption, international commodity prices and so on.

What you need to do [not explain], Mr. Minister, is to bring down the prices in the retail markets, especially of essential commodities. Check the price rise in wheat, rice, pulses and edible oils that are staple food for Indians. You can do so if you really try hard because you have huge huge stocks of food grains and a nearly unlimited purchasing power. Check rise in prices of milk and milk products. These are the best nutrition supplements for the common man, especially children. You need not artificially control the prices of petroleum fuels, but you can surely check corruption and inefficiency in petrol and diesel, kerosene and cooking gas management by public sector companies.

To say that Public Distribution System [PDS] is operated by the States is to shirk your responsibility of suitably incentivising, guiding and advising the States. If you can ensure an efficient and leak proof PDS in the country, the impact of ‘inflation due to rising growth’ will not hurt people too much.

Similarly, blaming the States for huge margins being charged by retailers and middlemen does not wash, dear Minister. In Delhi, you get vegetables and fruits in residential colonies at rates that are up to five times of the prices prevailing in the city’s wholesale markets.

So, dear Minister, be committed towards people’s welfare like Gandhi ji was. Don’t hide behind economic explanations for people’s misery.