THE POOR, THE RICH AND THE IN-LAWED ROBIN HOODS

From early childhood we come to know of rich-poor classification. Since my childhood I have come to know that my family is poor compared to many others while many more families were poor compared to our family. I have never been trained to be hateful to the poor or the rich. I trained not to be jealous of the rich. The entire idea was to improve the lot of the family over the years. It is much later that I came to know of various gradations of the rich and of the poor. It is amusing that the educated people at intellectuals talk about 1% rich making life difficult for 99% poor. More amusing is the politicians and political parties – almost all claiming to be pro-poor and none wants estigma of being called pro-rich. In search of the poor I just don’t understand the basis of 1% rich – 99% poor divide nor do I understand what do the political parties and politician mean by calling them themselves pro-poor, which the poor are they talking about ? It is quite possible to have at least 10,000 intervals of income (all wealth) and find 9998 groups of people who are both rich and poor compared with some others. People who earn Rs 110/- (USD 2) per capita per day are regarded internationally as on the poverty line. India’s Planning Commission seems to consider families with per capita daily consumption expenditure of Rs 28-35 as those on the poverty line. When the diesel prices are raised, political parties oppose the move because rising price of diesel will cost an increase in transport cost, taxi and bus fares and the prices of all article consumptions that move from origin to consumer destinations. Whatever the price, my driver’s family in Kolkata has to buy items from the shops, which is inclusive of the cost of transportation based on diesel price. My driver is from a poor family and will have to bear the impact of diesel price. Hike. But such poor families as my driver’s family are a small percentage of the population of the dwellings in Kolkata. My driver’s family depends very little on a daily basis for taxis, mini buses, buses and diesel operated power generators. Most of the people in Kolkata who depend on diesel are much richer than my driver’s family is – their children go by school buses, their parents go to office in bus or mini bus. On the other hand in the native village of my driver, who hails from Bihar, very small faction of the people use on a daily basis, buses, mini buses and many of the daily consumption of goods are produced locally and transported over small distance by vehicles that do not use diesel or petrol (eg. cycles, rickshaw vans, hand-pull or animal driven cars). It is not clear of to which of the poor interest that the political parties are trying to protect? Some political parties organize strike/bandh to protest against high inflation or diesel or petrol price hike. These do not effect the income of the people who directly or indirectly consumes lot of diesel/petrol. On the other hand these reduces the income of the people who offer their services on a daily basis in the labour market as electricians, plumbers, articians and tiny vegetable vendors. Which category of poor people do the strikes and bandhs, protect or hurt ? As for the class of poor people in rural areas, irrespective of how much diesel price or petrol price increases, rice, wheat, kerosene and sugar are distributed to them at fixed price much lower than the ruling market prices. It is only the better off, richer people who are more effected by diesel price rise and the political parties wants to protect their interest rather than the poor people around the poverty line. It is sad that we have innumerable class of poor and innumerable class of rich people in this world. Ideally the world, should have been plentiful of goods and services, made available through the hard effort of each persons contribution so that each person can draw as much from the pool of goods and services as each one needs. Marx would have loved to live in such classless irralitarian society where no one apparently exploits any one. Unfortunately there is no way to measure and justify the needs of different person. Unfortunately again, those who are highly productive and capable of contributing maximum to the goods and services pool, there is no way to prove that they will not be exploited by the people whose needs happen to be greater than the highest contributors. How some are richer than others ? Why are some people rich – one reason is that they have through any heritance of lot of wealth that was originally acquired through muscle power or manipulation. Some people however, have become rich because they happen to be inventors as well as entrepreneur and have the luck of making success in the market place (for example, Mr Bill Gates of Microsoft). Some rich helps some poor There are numerous such examples of rich and wealthy man. Many rich and wealthy man happen to be philanthropic and give away lot of their wealth/income for the benefit of the poor people. Many charitable trusts and societies receive lot of donations from the rich and wealthy people, not only belonging to the top 1% but belonging even to the fourth decile of income (31%-40%). Besides individual, many corporates and clubs as well as religious institutions are fabulously rich. Some of them also allocate some of their resource or people who are poor or economically handicapped. State/Government’s Robin Hood role But why should poor people depend on the arms on the rich? Since there is no King or Emperor now-a-days, the poor has the right to get redressal of their unjust poor status from the State/Government, which has to take up the role of Robin Hood agency (Robin Hood was a heroic outlaw in English folklore. A highly skilled archer and swordsman, he is known for "robbing from the rich and giving to the poor"). The government must be able to spend as much money as is required to make the poor reasonably rich : they should get protected from inflationary price rise or reduction in income due to unemployment/under employment. Were would the government get such money ? The government will tax the various classes of the rich and also take loans from various classes of rich – loans that will be repaid along with interest in the future by raising more loans and more taxes from the rich. The money ultimately comes from the rich and goes to the poor but now it is no more charity of distribution of arms. It is the haftha (money extortion). Haftha collected by middleman called government (lawful Robin Hood) /politicians for distribution to the poor who appoints this middleman by casting votes. All this is fair enough. But problem remains: how do the government/politician distribute the haftha (lawful part, forget the unlawful part) collected to various classes of the poor: by giving a subsidy of Rs 350 per LPG cylinder to the poor people (?) who can afford to buy costly gas ovens or by giving two more days of wages to a BPL man under the rural employment guarantee scheme ? Robin Hood’s distribution of looted bounty There are many ways and forms in which the State/Government distributes the monies robed from the rich to various classes of the poor. Many of the capitalized states now called them welfare state. When the economy goes into depression, the government gives doles to the unemployed. If there is a structural change in the economy, the state provides re-training facility to labour displayed by structural changes so that they can be employed again to the new jobs that are being created. In many welfare states, the government owns and manages, hospital and health services, for the benefit of the poor. Government also spends huge amount to create and maintain education infrastructure so that the children of poor classes can have access to education at relatively low cost. The rich capitalist countries depend for their economic growth largely on investments made by private individuals, groups and companies. They can afford to do that because the poor in their countries are much better placed in terms of standard of living compare with other under developed / developing countries. In underdeveloped/developing countries like India, even most classes of rich are poor in terms of standard of living as compared with the rich in the rich capitalistic economies in the western world. Here, Robin Hood role has the opportunity of greatly expanding its role. Here, the government sets up its own companies for utility services (electricity, telecommunications, etc.) If government arranges to set up machinery that would give wages to unemployed people in rural areas for 100 days a year against some productive or unproductive unskilled jobs. It will not only set up school, colleges and university and pay the salaries of the teachers and non-teaching staff but also make education free to girls upto class X. Besides, provide each high school girl students free bicycles,andsanitary napkins. Students from poor families will get free books and financial assistance for higher education. Health services are maintained by the state with the entire infrastructure, the salaries of doctors and para-medical personnel are borne by the state, besides providing free medicine to pregnant women of poor families. Poor families are to be provided with food grains like rice and wheat, cooking fuel like kerosene will be supplied to poor families at a very low price compared to the market price. LPG, diesel, petrol are supplied to almost every citizen at subsidized (below cost) prices. Government should also give spaces on footpaths and roads to hawkers and auto service repairers free of cost. For poor households (husband and wife) the government gives Rs 42,000-50,000/- for construction of houses. Government also gives financial assistance for marriage of girls in poor families. To ensure that the students in the school come to attend classes the government gives mid-day meals free of cost. Government gives financial assistance to various association/clubs for pursuing the sports and games like foot ball, cricket, swimming etc. People in large numbers get killed due to consumption of illicit liquor, the government provide financial assistance to the effected families, probably treating this as similar to financial compensation extended to families effected by floods and earthquake. It is difficult to enumerate the extensive Robin Hood activities of the state developing countries like India. A large percentage of income of various poor classes come from the benevolence of the government and probably a much higher percentage of the expenditure of the various poor classes is subsidized by the state Robin Hood. If Robin Hood have unlimited amount of resources raised to compulsory haftha levies/taxes, there would not have been any problem in allocating the collected money for various purposes and various classes of poor people. Unfortunately, the resources that can be raised by the Robin Hood is, though enormous, is limited and falls short of the demand of various categories of poor. On what principles do Robin Hood make the allocations so that the allocation seems fair and optimal? The allocation of pro-poor subsidy/expenditure is also determined without reference to the short and long term impact on the load of the poor. Considering the case of LPG, the entire opposition Robin Hood parties demand that the price of LPG should remain constant irrespective of the level of consumption. So if the household consumes more LPG, the household enjoys greater subsidy. It is better to consume 24 LPG cylinder gas per year than consuming 6 or 9. As the prices of petroleum oil rise in the international market, a constant price of LPG implies rising rate of subsidy per unit of gas consumes. This encourages inefficient use and wastage of LPG gas in household kitchens. The great Robin Hoods have no idea as to why so much of gas is burnt, why there is no real cooking or heating is taking place. Some ladies after mixing the water with wheat powder (atta) and drawing from the dow, complete the task of rolling the material into shape of rotis – as many rotis as required for the dinner, then she switches on the gas flame and then get the fulka done one by one. Some other ladies roll a single roti and get a fulka done; and repeat this process for each fulka, wasting gas.Similarly cooking dishes boiling water without the use of lid cover lead to wastage of gas. Again gas is being burned while nothing is being cooked or heated up; the cook is busy cutting vegetables or washing them. Very few use pressure cookers to prepare rice or dal to save on gas because they think boiling rice and dall in handis and kadais test better (subsidy for special tongues). Such wastages take place in the case of kerosene, sugar, electricity, fertilizer, irrigation water, street-side tap water, and other items that are supplied by Robin Hood at huge subsidy. Robin Hood political parties do not bother about wastages nor do they bother about optimality of the allocation of pro-poor subsidies among different sections of the poor in different locations/areas and among various purposes. If an additional Rs 100 crore is available through additional taxes or additional fiscal deficit (borrowing), the state/government arbitrarily decides what kind of additional subsidy expenditure it will make, depending on the pulls and pressures from various subsidy-mongers. If the government is constrained to reduce the subsidy, if decides arbitrarily as to which kind of subsidies are to be cut and to what extent ? The Robin Hood opposition parties however, does not want any cut in any subsidy but argue for more subsidy on every possible account. This problem is difficult in multi party democracy. But easily solved in single Robin Hood party in communist countries where whatever the single parties Robin Hood functionaries decides as subsidies are implemented without any protest. In countries like India, with multi party democracy the percentage of population covered by state Robin Hood subsidy expenditure is huge. First, the people on or below the poverty line who earns maximum upto Rs 60,000/- per year. They cannot pay income tax but get all sorts of subsidies : however, they have to bear indirect commodity taxes on whatever they purchase outside the system of subsidized supply of essential goods by Robin Hood. These group of beneficiaries of subsidy account for about 30% of the population. Next 30% of the population are from families with annual income of Rs 60,000 – 1,55,000/-; they do not pay any income tax. But receives many kind of subsidies including subsidized food rations. The third group of people are from families with annual income of Rs 1.5 lacs to Rs 5 lacs. They probably account for another 20% of the population and pay a maximum of Rs 30,000/- as income tax. They also enjoy all these subsidies on bus fares, train fares, subsidized ration items, subsidized education and health services. Next comes the people who come from families with annual earnings more than Rs 5 lacs to Rs 50 lacs. May be they account for another 10% of the population. The maximum income tax an income earner in this group pays is about Rs 15 lacs per year. They are the maximum beneficiaries of subsidy on petrol, diesel, and LPG gas cylinder. Thus, roughly 90% of the Indian population enjoys subsidies and only a small percentage of population pay substantial part of the income taxes collected. The families with earnings of more than Rs 50 lacs also enjoy, if they so desire, subsidy on purchase of solar power devisors. Indians therefore, are a great subsidy mongering, subsidy driven society but this society is not concerned at all whether they are conic disease of subsidies is sustainable, whether the subsidies are going to hurt the economic strength of the nation in future or they are travelling towards another great bankruptcy ?

An Uninspiring, Smart Budget: Pranab Mukherji's Bullet Biting

Dinesh Trivedi, after biting the bullet at his own discretion as Railway Minister, may get the bullet surgically removed and wait for rehabilitation. Dinesh tried to get 3% extra revenue by raising passenger fares. Net extra resource mobilization by Pranab Mukherjee will be even less than 3% of his total budget size. Pranab could not bite the bullet the way his current Prime Minister did when the latter was 20 years younger. He has just two more Budgets in 2013 and 2014 if he fails to become the President meanwhile and then retire in 2015 as one of the most experienced ministers in India, awaiting some lifetime awards. Today, he had a few difficult things to deal with: to turn the fiscal deficit down, allure exports to bulge to contain worsening current account deficit, find a breakthrough from the roughly equal division of 14 % money income growth into 7% growth each in real GDP and price level. He used 120 minutes of the customary brilliantly crafted speech as part of Parliamentary process to follow the standard Bengali ‘thor bori khara, khara bori thor’ recipe, to offer his countrymen a run-of-the-mill meal with sweet & sour appetiser soup during March 16 lunch hoursl, leaving the economy slog on its own as it had been doing in the past eight years.

His 2012 Budget gave a lip service to the economic columnists’ prescriptions: fiscal deficit will continue to be high at 5.1% in 2012-13 compared with 5.9 % for the year that ends this month – far higher than the 3% ideal that the country has long been waiting to achieve. I hope that the Reserve Bank of India gets satisfied with this 0.8% point budget reduction in fiscal deficit to cut interest rates since it is not accepting the argument that India’s inflation being mostly structural in nature, higher interest rates hurt only growth rather than help reduce inflation.

The current account deficit does not get any strong kick to shrink from the high level of 3.6%. The Budget does not show how the current gap of 6% points between export and import growth rates will be narrowed. The subsidies may not continue grow as the Finance Minister promises to keep the subsidy bill below 2% of GDP. It is to be seen how he responds to the likely opposition party demand for restoring the proposed 14% cut in subsidies on fertilizers, LPG and diesel. Even if he keeps the subsidy bill at the last years level, it would be good beginning. The expansion of the service sector tax base and the 2% point rise in the service tax rate to 12% and the complete withdrawal of the excise reliefs granted in 2008-09, together with increased subsidies and higher allocation on inclusive growth will not result in any anti-inflationary of the Budget: rather all this may marginally stoke the intensity of the fire of inflation currently ruling at about 7%, though considerably lower than the inflation rate a year ago. The Finance Minister expects the inflation rate to comedown in 2012-13. He also predicts a real GDP growth of 7.5% in 2012-13 compared to less than 7% this year. India has no way of accelerating economic growth in the next two years to return to 9% plus annual growth trajectory.

The stalemate on further economic reforms will continue till a major economic bankruptcy afflicts India again. Till that time, the Finance Minister will depend on the MPs to pass the amendment bills and new legislations in respect of pension regulations, banking, SIDBI, NABARD,, micro-finance regulation, NHB, regional rural banks, enforcement of security for interest and debt recovery and stamp act. He also hopes that the States and the legislative will clear to enact good & services tax and direct tax codes.

There is nothing significant in the Budget that would spur private sector. There is nothing to indicate the large public sector units are in substantial capacity creation investment activity either. The Finance Minister does not seem to mind a slower investment growth and a weaker expansion of the country’s medium-term growth potential. He seems to be satisfied that the large number of machinery import customs duty reductions and reliefs would usher in industrial investment in a major way.

Even if the Budget fails to cheer up the industrial sector in general, especially when the interest rates do not have a chance to start a quick downward movement, many other stakeholders will rejoice: income tax-payers will welcome the small tax reliefs of a maximum of Rs22,000 per year, even without investing in tax-free bonds or equity, for which the Finance Minister has announced special schemes. Stock markets brokers and retain investors will be happy with a dramatic reduction in the securities transaction tax: hopefully, stock market turnover would go up substantially.

But the Finance Minister has not lost focus on what he could do on his own: increase spending on stakeholders in rural areas and agriculture as also women, people below the poverty line, child and mother nutrition and health, education, vocational education, drinking water, employment guarantee, rural roads, etc. All these will have long-term positive impact on the society and productivity of the people at the bottom of the pyramid. All this spending also keeps the voters and the legislators happy. One of the fundamental features of Indian budgets will be this: spending all the way for inclusive growth by raising revenues or borrowing. At the same time, the Finance Minister has done whatever possible to enhance the effectiveness of these spending by better targeting of beneficiaries and controlling leakages. He has announced various government initiatives to use modern technology and unique identification facility including direct transfer of subsidy amounts to the bank accounts of the intended beneficiaries. This should help him contain the leakage of subsidies and reduce the subsidy bill. Within the finance ministry, he has continued efforts to simply forms, ease refunds, reduce speedy disposal of disputes. That is a special redeeming feature of his Budget.

The Finance Minister cannot do all things: he cannot solve land acquisition hurdles to industrial and infrastructure projects, he cannot pave the way for change in labour laws either. And, while ensuring that a longer smoke cost about 5% more, adding descent additional revenues, and assuring all a free white paper on all money painted black, he has proposed a few smart amendments to the Fiscal Responsibility & Budget Management Act as part of the Finance Bill to enhance its usefulness.

Much Ado Over Ghost of 51% FDI Multi-brand Retail

Now that the Government has decided to defer decision on allowing 51% foreign-owned Indian companies to do multi-brand retailing in India, Indian Parliament has been saved from another winter session generating heat without work to cool down Delhi's cold and cough among the Indian educated elite. It is not very clear though why the Congress Government had to get a Cabinet clearance on 51% FDI retail before it could get the Parliament consider and pass the long pending legislation items like Land Acquisition Bill, Companies Act Amendment Bill, Lokpal Bill and a host of other bills and draw Opposition Political Parties into the game of stalling Parliament functioning for the first nine days (out of 21 days) of the Winter session: the FDI decision could have been announced after all major legislative business were over.

Good that the intense political drama over an inconsequential issue has come to an end temporarily. India can afford to wait for some more time till another bankruptcy situation arrives when Indian politicians would have to eat their own words and beg for FDI in so many areas because of compulsion. The US dollar value of the Rupee has depreciated just 16% in last four months and not yet adjusted adequately to the 30%+ inflation in the last three years. Interest rates are at some peak after 13 successive Repo rate hikes by the Reserve Bank of India. The stock markets are down and nervous as export growth is faltering, fiscal deficit overshooting budgeted targets and inflation reluctant to come down despite RBI's anger. Current Account deficit is going to be higher and economy GDP growth rate falling back to 7% or lower with hardly any strength in industrial investment. The situation reminds one of the 1989-90 bankruptcy crises and rekindles hope for new doses of economic reforms under duress / precarious economic compulsions. It would be interesting to see which new coalition Government two years down the line gets the responsibility to bite the bullet.

Be that as it may. It is worth revisiting the recent drama once again. Those who objected to FDI retailing was not prepared in advance to deal with the issue. They had done well in reacting smartly thinking off their feet n the streets. They became great economists overnight and invented a thousand reasons why the idea of FDI retailing was not only bad but evil. Let us enumerate their innovative arguments.

1. Retailing is not high technology staff that can come embodied in FDI, said the opposition experts. The same old Indian belief that Indians are poor only in high technology but very proficient in low technology activities would not easily die. The fact however is that Indian brain power is equally weak in making the best use of even low technology: just consider the quality of education based on the use of the most simple, black board and white chalk technology of teaching. But retailing is more organization than technology. How good are Indian in organizing things efficiently and effectively? Track record does not show any promise. Wholesalers, stockiest and distributors have remained virtually the same in the last forty years and large fast moving consumer goods companies continue to depend on these outdated, feudalistic chain of stockiest and distributors. Foreigners have innovated in organizational alternatives: India continues to remain dependent on archaic organizational designs for retailing. This is issue that dumb politicians will ever be able to recognize, let alone such stalwarts Jaitly, Sushma Swaraj, Yechuri, Karath, Buddhadev Bhattacharya or Mamata Bannerjee or Advani. Organizing retail business is not of the same low level of organizing political parties, rallies, strikes or the Common Wealth Games- the Indian way.

2. Only 51% FDI embellished Retailing will hurt the Indian Farmers, say the great opposition. How? They will have to sell only to a few FDI retailers who will squeeze the farmers sooner or later. It seems that FDI retailing companies are likely to be more or less akin to local political mafias who can force farmers to sell the goods only to the small or big traders favored by political mafias. These politically patronized traders squeeze the farmers and share the spoils with their political bosses. If the 51% FDI retailers come with their massive (?) money power, they will wean away farmers from the clutches of existing trade mafia and exploit the farmers thereafter. So farmers will continue to be exploited. So, why not get some FDI also!!!
Why would 51% FDI so evil and 26% not so evil so far? No one knows. Who will bring in the matching 49% of the massive FDI investment dragon? No one knows. Maybe Reliance Fresh or Spencer’s become 51% FDI. Will 51% FDI retail companies get listed and widely held and farmers and political mafias given shares so that all can share the spoil of the 51% retail? No one knows!!!
Will there be just a couple of 51% FDI retailers in India? Can't there be ten such 51% FDI retail companies fiercely competing in the Indian market? With competition there would be difficulties to squeezing farmers. There is no need to think of these - 51% FDI retail is a dragon that will gobble up Indian farmers as if there are no farmers as highly productive and as least cost supplier as Indians and India does not import goods to be retailed (unlike USA where imported ware from China - tables, chairs, clothes, toys, cutlery, etc and from other countries including India - rice, fish, spices, fruits, fruit juices, etc

3. Dragon of 51% retail will squeeze the Indian consumers says the opposition. How? They will soon drive out all existing retailers from the market and then increase their prices to fleecy the Indian consumers. How will this happen? How will the 51% FDI Indian companies sell high priced goods to the 40% Indian below and around the poverty line? How much of the remaining 60% of the population will get to buy from the outlets of 51%FDI retailers? Have FDI embellished insurance companies and mutual fund companies driven out all competition? How the low FDI content Indian airlines are companies doing by fleecing Indian air passengers? Have McDonald, Domino, Pizza Hut driven out similar Indian businesses or more such Indian shops have emerged to meet the demands of the growing new high middle class? How will the big and small FMCG companies change their procurement, marketing and distributing network and strategies once the 51% FDI retail come? Will they sell their entire produce to the new big retailers? Britannia biscuits, Maggie noodles, Hamam soaps, Horlicks, Nirma detergent, lux toilet soaps, Emami mustard oil, Colgate toothpaste will all be gobbled up by 51% FDI retailers.
What about the consumers who visit daily to municipal markets to buy fresh vegetables and fish every day - they will all flock to 51% FDI retailer outlets? What about households who buy daily grocery items on credit from the neighborhood kirana shops and pay off monthly? Will the FDI retail outlets start operating on credit sale mode? What will the small rural housewife who comes daily to the metro/ semi-urban market to sell less than 10 kgs of vegetables and flowers grown in her backyard? She will give up growing anything in the backyard? What happens to the panshops and hawkers? The FDI retailers will kill them? The FDI-retail opposition lobby knows better.
4. The 51% FDI retailers will kill the small traders and local kiran shops leading to huge unemployment says the opposition lobby. How? They can easily imagine that under the FDI influence, Indian consumers will discard their habit of purchasing as they walk back home from office, stop bargaining with the pavement hawkers and drive out vendors who bring vegetables on the door step. And while all these people currently employed in retailing, the 51% FDI retailers will retail using machines only!!!

The FDI-retail opposition lobby is matched by the pro-FDI lobby. They have lot of arguments.
1. They say "51% FDI retail will bring in foreign exchange required by the country". We know that 26% FDI retail did not bring Foreign exchange: nor did 100% FDI food processing bring in much forex. Why speculate an argument?

2. They say '51% FDI retail will reduce inflation as they will offer lower prices to the consumers'. For, they will pass on the benefits of efficiency and economies of large-scale operation. Will the FDI retailers come to benefit the Indian consumers or make money on their investments and organizational innovations? If Government continues with large fiscal deficits and waste money in unproductive projects and the agricultural production and productivity fails to grow fast enough, no one can reduce inflation.

3. They say '51% FDI will increase employment'. All new activity increases employment but that may partly be replacing employment in existing retail operations. FDI or not, Investment in retails can increase employment. What is so great?

4. They say, '51% FDI retail will lead to investments in infrastructure - rural roads, cold storages and go-downs'. Yes, large retail business cannot grow without improvement in infrastructure. If the non-FDI retail has not grown enough because on infrastructure constraints why would FDI retail take the responsibility of improving the infrastructure of roads to move goods they will be dealing in by using those very long 16 wheeler trucks/ vans. As if the roads will be used by only the FDI retailers.

The reality is that one does not need any argument for or against 51% FDI in retail. The retail business, as is true for any other business supplying goods to millions of households should have no entry barrier and attract investments. Even if 100%FDI in multi-brand retail is allowed today, we may not see much of FDI rushing in just in a year or two. India is a big and sprawling country with a great diversity of consumers.* Whether non-FDI or FDI, it will take decades to modernize Indian retailing. Land and floor space acquistion is neither going to be easy or inexpensive. Contract farming is not going to be easy to manage in local political mafia dominated rural areas; loading, unloading, transportation and transshipment with substantive gains in efficiency and cost savings will not be easy to achieve soon. There will be lot of experimentation with alternative business models and strategies. Even over a decade, the scale of FDI investment in retails and size of FDI operations are not likely to become a great contributor to forex inflows relative to India's needs or occupy a significant share of the entire retail market in India. But by then the retail market might have changed for the better - lot of wastage of farm produce in transition, storage and handling would be avoided, wares will be clean and safe, the farmers will find their lands more valuable, the kirana shops will find their shop premises and floor spaces more valuable (if they could just increase the productivity substantially) and the consumers will not be fleeced by traders and middlemen protégé’s politicians and political parties.

But Indians are more comfortable not experimenting in the face of false scare of an Unknown, imaginary Dragon that can devour the children if they do not go to sleep.

How imaginative are the Indian 'frog-in-the-well','jack-of-all-trade' political intelligentsia. India with a 1250 million population is served by about 15 million retail store outlet of various types. As against this, The US population of 330 million is served by just 1 million retail stores. The largest retailer by sales is Wallmart which now has 8150 outlets, of which about 4400 outlets serve the 33 crore US population. Besides there are so many outlets of Target and Dollar Street, and of course outlets of speciality retailers like Home Depo, CVS, Seers, Jc Penny, MacDonalds, Pizzahut, Domino, etc. And of course so many malls that house separate floor space for different brands like Macys, JC Penny and others. Besides, Amazon reaches households so many wares.
If only 10% of the Indian population of 125 crore is targeted (leaving aside the rural areas and the urban poor), a big retailer would need at least 1500 outlets. If an outlet is opened every third day it would require close to 10 years. Land and floorspace are not going to be so easy to arrange and cost would be high in urban areas. How insignificant is the FDI retail issue can be judged from these numbers? There are more stationery, grocercy retail outlets than Walmart and Target have. How will FDI funded retailers in India monopolise and place the Indian consumers and farmers at their mercy and drive the kirana shops into extinction. How many MacDonald, Pizzahut, Domino and Subway have come up in India in the last five years and how many local restaurants and eatinng houses have closed shops as a result?

Economists Turn Easy Truth To Difficult Confusion

Economists generally appear a confused lot when they discuss among themselves. When they speak to others, especially journalists, they help journalists make arcane-flavored analysis to hide the simple Truths to project economists and journalists as sophisticated experts.
Recently, Chief Minister of West Bengal, Ms Mamata Banerjee reportedly had pointed out that the State’s Finances have been brought to such an alarmingly poor health by the previous Communist government that ruled for 34 years, that the State does not earn revenues enough to finance development capital outlays beyond 7% of the revenues earned. The former Finance Minister, Dr. Ashim Dasgupta of the CPM, it seems told the journalists that Ms Mamata has given out an incorrect percentage: according to his calculations, the Budgets he had prepared recently when he was in charge allocated 37% of the State’s budget receipts on development capital outlays. The current Finance Minister, Dr. Amit Mitra (the third Dr. Ace and second Dr. Mitra finance minister of West Bengal (Dr Ashok Mitra preceded Dr. Ashim Dasgupta), retorted back saying that his Chief Minister had given the correct percentage and gave out the basis of arriving at the percentage. Dr. Ashim Dasgupta told the journalists that Dr. Amit Mitra has used an illegitimate basis of calculating the percentage and had made a mess by mixing up capital account and revenue account items in calculation of percentage. This is in short the arcane analysis of the journalists that helped create confusion in the minds of the common citizens and hid the simple truths.

First, Dr. Ashim Dasgupta’s calculation is absolutely correct. His figures are as follows: of the total budgetary receipts (both capital and revenue) of Rs 88,000 crore, the development capital outlays were Rs 33,000 crore. Thus 37.5% allocation of total receipts was for development capital outlays. (The figures I use here are just for illustration and not the figures quoted). I am sure that both Mamata Banerjee and Dr. Amit Mitra would have no hesitation in accepting the percentage calculated by Dr. Dasgupta. Because this is the simple Truth#1.

But there are more simple truths. Of the Rs 88000 crore of total receipts, fresh borrowings amounted to Rs 22,000 crore. So, Dr. Ashim Dasgupta had to borrow about two thirds of the money he used to fund development capital expenditure. This is the simple Truth#2.

Why was such huge borrowing required? Because the revenue account had yielded very little surplus of merely Rs3,400 crore or so. This is the simple Truth #3. It means that of the total revenue earnings of about 60,000 crore (net of tied central govt. revenue grants), only about 7 % was available for development capital expenditure, the percentage that Mamata and Amit are quoting. This is the simple Truth#3.

Why is the revenue account unable to provide larger surplus to fund development capital expenditure? Simple because the State’s revenue receipts of Rs60,000 crore are eaten up by Salaries and Pensions etc of Rs 49,000 crore and loan repayments (capital account outflows) and interest payments of Rs 7,600 crore or so. This is the simple Truth#4.

Why are revenue receipts not high? We have not heard the Finance Ministers speak the Truth in this respect. But most learned people say that the low revenue receipts in the relation to the State GDP is because of leakages in tax collections and narrow tax base continued by the communist government. This may be Truth#5.

Why are the Salary and Pensions high? Some experts say that this is because of overstaffed Government machinery at the lowest levels and pensions and subsidies to fictitious persons. This may be probable Truth#6.

Why is interest and loan repayments amount to 76% of the net revenue surplus before interest payments of about Rs10, 000 crore? This according to learned persons is due to high level of borrowings of the State (about Rs200000 crore) and high interest rates on borrowings. This is probably the simple Truth#7.

All this may also mean that the State is falling into a debt trap. It needs more and more funds to borrow to fund development expenditure as also meet repayment obligations on old loans and interest payments on all loans. This means that the State Government is running a spongy scheme of more borrowing to service existing borrowings while capital expenditures unable to boost revenue incomes adequately. This may be the probable Truth#8.

There is no journalistic analysis to find out if the probable Truths are really true or not.
Nor, are the former and the current Finance Ministers giving any proof to show that the probable Truths are not true. All this is really amusing interest of Bengalis in economics.

Note: Had Dr. Dasgupta Ashim borrowed Rs 52, 000crore instead of 22, 000 crore he could have said that 72% of the budeget receipts were allocated to development capital expenditure. And, yet the fact would still be that only 7% of the revenues would have been avialable to fund development capital expendiure. Financing development capital outlays in good and only way out for poor States, but such development capital expenditre should lead to faster growth in revenue receipts in future uears to service the borrowings (inteest and principal repayments and generate higher revenue surplus to fund new capital expenditure in future years. The problem arises if this does not happen as the case seems to be in West Bengal so far.
Dr Dasgupta may argue that if the Centrl Govt can borrow and print money, why can't the West Bengal Govt. borrow as much as it requires? That is the usual childish argment. The State of West Bengal gets its share from the borrowings of the Central Govt. through both tied grants in aid and the positive impact on State's revenue receipts. And, the argument is weak because all states and the central government had agreed to cut their deficits and reduce borrowings as part of fiscal discipline. Communist West Bengal however does not believe in fiscal discipline, probably because there is no reference to this in Das Capital and its derivatives.

Road to Backwardness: Bengal Marched Past Potholes and Mud

Undergraduate economics teaches the importance of roads in economic developmet and growth. Economists' turnpike theorems seeks to establish faster roads to economic progress. In Bengal left-thinking fashioed economists for decades rejoice with Panchyati Raj and Land reforms as roads to economic progress and economic justice for three decades. Little did they realise that even in conceptualising/ designing and implementing panchyati raj, economists' optimisation rule is applicable. We now see West Bengal in the quagmire of weal economic growth impulses with panchyati raj and land reforms throwing out the communist dominated leftists rule and expose the hurdles that the 34 year- rule of economic stupidity resuting in nearly bankrupt State finances, road pot holes and vast tracts on unsed/ under-utilised with weak links for movement of inputs and outputs throughout the State/ Weal links created the hill agitation problem and Maoist terrorism in the Jungles areas while Tata's unwilling to set up Nana project on only multiple cropping high fertile lands with good links in Singur and no where else and JSW steel plant waiting for good road inks to accelerate implementation of its Steel plant in Salboni. Panchyats developed roads that are too muddy for villagers on foot to be comfortable with and highways including the recent 4/6 lane ones not allowing uninterrupted flow of vehicular traffic by numerous crossings and encroament of hman beings and animals from either side of the roads to regulate long distance vehicular speed to raise the costs of economic activity.

Dr. Abhirup Sarkar, a Bengali economists known for application of economic analysis to West Bengal in recent times has today penned an article on Roads in West Bengal. The conclusions are revealing of the incomptence of the elite that planned and ruled West Bengal for over three dces since 1977:
1. West Bengal has one of the longest network of roads given its size in the India. But West Bengal remains a weakly linked State in terms of the quality of roads.
2. The proportion of good, durable roads is low in West Bengal as compared to more developed States in the country.
3. Large tracts of non-agricultural land awaits good road links to attract industries.
4. Many good roads connecting existing industries to cities, ports, railway junctions and markets are good enough to nurse potholes and congestion.
5. Panchayat developed roads are horrible to negotiate on automobile wheels and do not together constitue an optimal road network for efficient economic activity.

At last, West Bengal seems to have been provided a clue as to what not to do in respect of road development. Let us see what Mamata Government can do to draw up a road map for optimal road development in West Bengal. Can Mamata remove the inherited roads block to accelerated economic growth in West Bengal?
She must be aware thata significant proportion of the good, wide roads in West Bengal are used by long queues of trucks, buses and cars for repair works on wayside auto-repair shops, parking of motorbykes, hawkers, open warehouses of sellers of construction materials and etc - a usage of roads that slows vehicular traffic, transfers private costs to public costs of transportation, congestion and pollution. Govt. spend tax payers' money not to benefit the citizens in general but to private encroachers. Some how Bengali economists are not yet ready to to identify private misuse of of public roads as a bottleneck to economic growth in West Bengal. If West Bengal has to really change, the habit of encroachment of public roads for private use by small businessnesses and their poorly paid workers must go - sooner the better.

Economic Policy for West Bengal Government: Scope?

The devolution of financial powers between the States and the Union governments in the Constitutional Federal structure probably does not unambiguously clarify the role of economic policy making at the State level. The US model and the EEC models are as much complex and could have been contrasted with Indian economic federalism for reforming the Indian system. This has not been done and the States have generally used political process to satisfy the State’s demand. West Bengal being the top industrialized State at the time of Indian Independence had to give up much of its legitimate demand for modernization and growth to accommodate the nice little slogans for balanced economic growth and backward region development. Therefore, West Bengal elites and intellectuals never used economics for policy making for the State. Nor did West Bengal have any view on what the State’s economy was, is or would look like in future. Selling dreams that would never be realized constituted economic policy making. For decades, West Bengal economy has been conceptualized primarily as a vehicle to demand, get or forget higher allocation of Government of India projects and expenditure in the state. The State Government published an economic survey every year with economic data and self-congratulatory composition: State Planning Boards and State Planning Department had been there without any perceptible impact on the State’s economic policy making and development.

2. West Bengal is only one among the several States in the Indian Union. In this Federal set up with constitotionally devised devolution of economic/ financial powers between the Central and State Governments, how far can a State pursue a set of economic policies that would effectively contribute to the economic growth, lower inflation/ higher protection against inflation, better employment, better income and wealth distribution and better quality of life for the State's citizens on a sustained basis? This has been discussed time to time in the past mainly from a political perspective but has not really been pursued consistently by Indian economists to yield a reasonable theories so far. When the economic reforms were introduced in the early 1990s, many political parties objected to liberalization, privatisation and globalization but did not have an alternative economic theory of their own (even the Congress which happened to be in Government and had to reluctantly being the economic reforms, did not have any consistent economic model or theory to justify the process of liberalisation). The Communist economist turne politician Finance Minister of West Bengal Dr. Asim Dasgupt proposed some alternative model that was probably unattractive to the economists and politicians including the communists and lost significance with the CPM government of West Bengal seeking collaboration of foreign capital from capitalist economies for the State's industrialisation. Many claim Chandra Babu Naidu of Andhra Pradesh did wonders for Andhra Pradesh and wonder about the economic successes of Gujarat under Narendra Modi. But the issue of economic policy formulation at the State level has benn neglected.

3. The issue had been rather one of getting more resources to the States from the Central pool. With the introduction of General Commodity and Service Tax is likely to intensify the conflict between the States and the Union Government. But how could the individual states pursue economic policies to meet specific goals of the States is not something that Indian economists have attempted. The European Common Marketm European Central Bank and Euro Curency is not yet successful and may be inconsistent with Indian federalism. But Indian economists have not generated any new theories or ideas to deal with the basic issue of economic policy making by individual State.

Economic Policy Paradigm of Government as Son of God
4. This was only natural because the State Government had envisaged a four-fold economic role:
(a) as a machinery to use whatever revenues happen to flow in to the exchequer and borrowings from the households’ savings pool for disbursing salaries (and pensions) to its ever increasing and scarcely performing staff and interest payment on ever increasing borrowings with sky as the limit,
(b) as a mechanism of acquisition of land with paltry or no compensation to the land owners and distributing them at low cost or free to others without land and needing land to do farming, set up factories and build residential buildings,
(c) as a catalyst for proliferating a micro-economic market structure of geographically and functionally distributed muscle-powered ‘license/ permit’ monopolies in the supply of building materials, education and medical services, in intermediation services for various sorts from allowing regularizing various unauthorized businesses like tea stalls, food stalls, vegetable and fish stalls, automobile repairing, construction of residential shanties and baths on footpaths, main roads, strips of lands meant for expansion of roads, as also in intermediation services for getting ration cards, birth certificates, hospital admissions, and
(d) as an unsolicited, unremunerated adviser to the Government of India on the inappropriateness and disastrous consequences of all the economic policies that it happens to pursue except nationalization, higher subsidies, higher corporate taxes, wage and pension increases for public sector employees, higher interest rates on provident funds, reservation of any type for most classes/ castes/ groups of people.

5. One economic policy option for West Bengal at present is to continue to same economic role of the State Government and therefore continue doing nothing more or new. Another variant of this status quo option is continue with the past while tinkering here and there with apparently pro-poor only measures like withdrawing State tax on LPG cylinders, increasing the number of people covered under Rs2/kg Rice distribution scheme, deferring the increase in taxi, auto, mini-bus and bus fares, crediting salaries of Government employees and teachers to their bank accounts on the first working day of each month. This kind of economic policy making would be simple and the consequences are well known. West Bengal economy will continue to grow so long as the Indian economy grows fast enough: if the economies of Bihar, Jharkhand & Oriya become fast developing West Bengal will have the benefit spill-over effects. Yes, the tax to GDP ratio will not improve from 4.5 % as ay present, debt burden will grow soon to such proportions to cause default and force emergency funding arrangements by the Government of India and the Reserve Bank of India. And, of course, West Bengal will witness a fall in her ranking in terms of economic growth rate, per capita income, percentage of population below the poverty line, state of education and health services. How does that future scenario matter to West Bengal now if such long-term objective or strategy or vision has not been of any interest among the elite and intellectuals advising the political rulers in the State? Status Quo economic policy by default is the most attractive option for West Bengal.

A Non-divine Government’s Economic Policy Framework
6. If, however, West Bengal happens to realizes that economic policy making is important, her elite / intellectual class and politicians must first get themselves convinced of the following:
(i) although the overall Indian economic policy remained the same for all States, many States have left West Bengal far behind in economic terms as well as in terms of quality of health and education services by just pursuing economic policies that were geared to certain economic strategy objectives of those States;
(ii) dreams, rhetoric by an all pervasive command and control State involvement at micro-economic level is doomed to failure as has happened in the past and the State role as a facilitator in economic development can only lead to serious economic policy making that has chances of succeeding;
(iii) economic policy making is neither easy nor anybody’s job and West Bengal has to deploy experienced expertise in applied macro-economics, public finance, industrial economics and micro-economics to formulate State-level economic policies designed to achieve certain long-term strategic economic goals: and
(iv) Generating a relevant and consistent set of economic policy options must be preceded by quickly evolving clarity on the long and medium term socio-economic goals and clearly articulated economic problems the State currently faces and their intensity. If the intensity of the problems is severe, the medium term goals may have to be moderated and instead of incremental changes in policy radical changes may have to be implemented.

7. For the purpose of the present discussion, we would assume that the medium term strategic economic goals of West Bengal would be something like this:
(a) To enable all citizens of West Bengal to increase their skills and productivity as well as gainfully deploy themselves in viable economic activities and create wealth for themselves so that they can progressively enjoy a better economic and social standard of living, beating the adverse impact due to inflation and slowdown in the Indian economy,
(b) To pursue such policies as would help maximize the flow and effective utilization of resources from the All-India public and private sector pool of investment and expertise into West Bengal,
(c) To get out of the habit of running State Revenue Budget deficits to a progressively rising Revenue Budget Surpluses to fund State-led development projects and thereby also contribute to (a) and (b) above,
(d) To quickly demolish the system of territorial and functional monopolies and rent-enjoying elements in the economic micro-structure and administrative machinery and bring in transparent, competitive forces at play, thereby reaping a few percentage point gain in State Domestic Product growth currently lost due to corruption, administrative delays, lower productivity, under-utilization of available productive capacity, stifling of innovations and large incidence of shirking, especially by people who are remunerated by the Government. This will in turn contribute to (a), (b) and (c) above.

8. We would now make a few illustration of the economic policy options consistent with the four medium term goals listed above in Para 5. Instead of using new nomenclature, we use the economists’ fashionable terminology and cliché.

Inclusive Growth and Exclusive Subsidies
9. Enhancing the economic power of all households would involve accelerating the rate of growth of State GDP per capita along with subsidies to the poorest (the tribal community in jungle mahal, the under-employed landless labor and the unemployed: (i) maximize utilization of the NREGA, (ii) allow and encourage farmers/ fishermen the access to demand from food/ vegetable/ fish malls in cities and urban areas, (iii) expedite the Central Government’s vegetable cluster centers coming up and (iv) do not apply exclusion principle to restrict farmers and fishermen from taking advantage food/ vegetable mall owned by foreign capital or domestic capital by using the blatant lie that these smalls affect income of small retailers small groceries/ vegetable or fish vendors just to protect the market power of politically supported small club of wholesalers. Finally, augment the production of rice and vegetables by increasing productivity per unit of land – the variety f seed that is about to cause a quantum jump in rice productivity is still eluding West Bengal.

10. Subsidies to the poor is fine, but equally important is to apply exclusion principle to tax households on their purchases beyond four LPG (liquefied petroleum gas) cylinders per year (this isn’t difficult to implement these days where LPG booking and delivery is computerized). Speeding up approvals to GAIL and such other agencies interested in supplying natural gas for cooking through network of pipelines to each kitchen at a costs lower than cost of LPG fuel. Yes, poor buying water is a non-inclusive growth: but exclusion from subsidized/ free water supply should apply to households in multi-stories buildings where a flat costs in excess of Rs. 30 lakhs or for washing cars and taxis. Water consumed can be recorded by meters and consumption beyond a monthly limit per household in such flats. Instead of not delaying the process of revising the fares of buses, taxis, mini-buses and auto-rickshaws to revise in response to change in petrol and diesel prices, agitate with the Government of India to raise the limit of standard deduction (zero tax) for income tax purposes linked to auto-fuel prices movements and hasten the pace of shifting to CNG (compressed natural gas) – using the new hydro-carbon policy of the Government of India.

Human Capital for Growth
11. Creating employment for the youth is fine but not for clerical-manual work in Government and municipalities. Fresh recruits by State Government/ municipality/ Zilla Parishad/ Panchyat service must necessarily have professional qualifications in citizen care administration and demonstrated proficiency in the use of MS Word and Excel. Make graduates turned out by Universities employable would be more productive than giving them state jobs or forcing new business units to recruit them locally through political goons. To rely on employment creation through private sector investments, bureaucratic/ administrative constraints on setting up of industrial units need to be removed, complete lists of land already acquired by Government lying idle in different locations need to in public domain as soon as possible and applications/ bids for lease on a transparent basis needs to be invited. Also, publish lists of land already leased to or acquired by private sector but not being used, giving the owners time limit beyond which such land would be taken over/ back for auction/ new leases (appropriate legislation may be necessary). Liberalize exit policy in respect of industrial establishments with less than 100 workmen so that such units can be down-sized / closed and assets become freely transferable. Department of labour need not wait till industrial disputes are brought up their notice: let the Government officers monitor labour relations in each unit on a continuous basis and be proactive enough to tackle brewing disputes before they become fully blown wars..

12. Encourage young entrepreneurs to run businesses like household plumbing, electrical and electronic repair services based on phone calls/ emails in cities, provided they have police verified service assistants with complete personal identification details. Make regulations on private medical doctor clinics to keep computerized record of all medical treatment service to each patient and issue computerized receipt for fees paid by the patients. For this purpose, require doctors’ private clinics to have a computer-trained patient services attendant and a professional nurse attendant. Have surprise visits and checks with roving squads. Make it mandatory for all pharmacy and drug stores to issue computer print-out receipts against all sales. All this will improve quality of medical service, professional employment and improve revenue collection.

Structural & Institutional Reforms

13. West Bengal needs all pervasive reforms in the market micro-structure to end economic crimes like levy collection by musclemen from business units/ shops, forced intermediation (dalal chakra) in hospital admissions, engagement of medical attendants by patients hospitalized, issue of ration cards, birth certificates, mutation certificates, registered property deeds, political party-sponsored locality-wise monopolies of building material supply and mobile vegetable vending on carts, levy collection by policemen from goods carrying trucks, etc. Inflicting of social costs by private auto-repairing shops, pavement hawkers, trucks awaiting on the road for custom and by shop-owners displaying ware on the pavement and roads must attract hefty financial penalties and cancellation of trade licenses: it is a pity that the roads broadened at public cost for smooth traffic flow are being occupied by stationery cars/ taxis/ trucks queuing for servicing, repair and painting, thereby narrowing the space available for pedestrians and movement of vehicles. Separate Road Clearing Force need to be put in place. This is all part of good economic governance that adds to efficiency gains and growth.

14. Merely repeating that West Bengal is the Gateway to Asian tiger economies is of no use. The State must negotiate with the Central Government to open up duty free trade with Bangladesh in cereals, coal, jute, tea, garments, vegetables, fish (not just hilsa), foot wear, drinking water bottles, etc. This would benefit the citizens of West Bengal more. Similar, State needs to take active interest in shaping trade agreements with Myanmar, Indonesia, Thailand and South Korea to maximize benefits to West Bengal.

Fiscal Prudence

15. A well thought out strategy to get out of the unsustainable debt trap and generating revenue budget surplus is the key to enhancing the State’s ability to pursue prudent economic policy. Immediate need is to target a slowdown in revenue expenditure together with higher revenue collection both by the State and all local self-governments. Only surplus revenue budgets can help the State government, municipalities, and panchayats to make necessary contribution to infrastructure projects and other development projects to get the benefit of attracting central matching grants and aid. State and municipalities have to improve their credit ratings to raise cheaper debts for funding credit worthy projects. Tax leakages are huge at present, partly because of the state-wide web of tax-evasion intermediary services collecting fees in black: this economic crime sector has to be totally crushed with the help of information technology, tracking cash transactions of such economic offence supporting intermediaries and day-to-day surveillance. Tax base needs to be broadened and subsidies need to be more targeted and direct. Industrial promotion may needs very little incentives if the industries do not have to bear costs of getting things cleared in Government and municipal offices. Government does not have a proper system of collection of annual land revenue (Khazna): the system needs immediate computerization, bills (separate for annual khazna installments and interest due on unpaid annual kahzna) may be sent to each household/ land owner and banks may be allowed to accept payments against these bills for direct credit to Government.

PPP Investment For Capacity Expansion

16. Now that the subsidized land acquisition support to private investment is being withdrawn/ minimized in the State and in the whole of India, PPP (public private partnerships) models to tap private sector investment would require fast track single window clearance mechanism and reduced politically convenient obligations on PPP projects immediately and more politically difficult relaxation on industrial exit laws after a while. The scope of the standard application of PPP model needs to widened to reduce the burden on the State exchequer: existing assets like Kolkata Zoo, other forest enclosures, Staid, vintage theater halls, swimming pools, libraries, river bank recreation enclosures and the like could attract private investment under PPP model for up-gradation, expansion and efficient, cost effective maintenance with flexibility in user charges for the rich on particular days of the week. Even in agriculture, PPP model with low equity and low interference from Government could help if contract farming and marketing of agricultural produce are also allowed.

Conclusion

17. Economic policy options appropriate for West Bengal at present and for the medium term future do not require arcane analysis. These options are well-known: what is required is the political will and administrative skills.

Inflation and Govt. Must Listen to RBI's Interest Rate Music

In a post March this year (http://senkonomix.blogspot.com/2011/03/amusing-love-for-inflation.html), we were amused with the high deree of tolerance of high rate of ination in the previus three years. Since then the Reserve Bank of India have further strengthend its anti-inflationary polcy with interest rate hikes in May and in July. With this, the RBI maintains its ec growth projection for the year ending March 2012 at 8% but now projects a7% infation rte - 100 basis points hiher than its projection released in May.

For the layman, it is amusing to know that a 100 basis point higher inflation means no reduction in economic growth rate. Equally interesting, this will be accompanied by, on present reckoning, a rise in interest rates by 275 basis points or so (already banks have transmitted 225 basis interest increase in the first four months of the current fisc). So, what will cause higher inflation - external factors and higher interest rates or higher fiscal deficit. This or high profile economists to explain: most likely consesus -: all these factors will increase inflation to varying degrees.

Yet, these inflation, economic growth and interest rate projections may have to be revised again soon, the RBI apprehends, if the petroleum oil and other commodity prices do not ease in the international markets, if the monsoon does ot favour a bumper crop in India, if the government does not take adequate supply augmentation policies in time and if the fiscal deficit of the Government of India exceeds the budget target of Pranab Myukherjee. so, inflation rate may be higher than 7% and interest rates may have to be hiked further by the RBI.

RBI is partivcularly worried that the demand pressures, though somewhat moderated in some of the highly interest senstitive sectors as a result of the 225 basis point rise in modal lending and deposit rates, continue to be strong in most sectors. So, the repo and reverse repo rates were raised by 50 basis points on July 26: this the RBI expects to further weaken demand pressures in more interest senstive sectors as well as the less interet sensitive sectors and reduce money supply growth by 50 basis points to 15.5% and non-food credit by 100 basis points to 18% in 2011-12.

It would seem to the layman that the RBI would be comfortable if the economic growth rate declines to say 7% or lower and inflation rate to fall to 6% or lower. Otherwise RBI may again raise the lending and borrowing rate to pull down the economc (GDP) growth rate. But even if growth rate falls below 8%, RBI may be stil forced to raise interest rates if monsoon does not deliver bumper crops, and/or international commodity prices rise and/or fiscal deficit targed is exceeded by say 50 basis points or more. So, we are going to be in high interest regimes.

Unfortunately, higher inflation will automatically icrease working capital requirements and demand remais strong, higher inteest rates may still be absorbed. This may lead to higher interest rates again. On the other hand, if the monetary policy succeeds in bringing down demand and GDP growthm and banks face creditt defaults, RBI would do something to ease prudential norms temporarily to stem any financial sector instability. Te best thing for the layman there fore is to tighten the belts and pray to God that there is a bumper crop (and bulginng food credit) and a fall in world commodity prices. Tere is no point in praying to the Government as government is incapable of reducing expenditure growth and in no mood to reach the fiscal deficit target. Only hope is that the lower GDP growth may still lead to highly bouyant growth in tax revenues - better than what the government had optimistically budgetted for because of reduced leakages and higher value of sales.

God RBI will not relent till inflation rate shows consistent down trend even if higher interest rates contribute to slightly higher inflation temporarily. Let us keep our fingers crossed.