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.

Land-barred Economics of Bengal

When the Singur land acquisition debate and agitation was at its height, I had pleaded with many economics intellectuals that at the heart of the political problem in this subject lie in the reluctance to apply the knowledge of economic principles and quantitative economic empiricisms (http://sensarticles.blogspot.com/2009/07/3.html). I had argued that land has to be valued interns of the present value of the time stream of net benefits the land is expected to generate from its alternative use. A smart young economist pointed out that present value method involves use of discounting factors and the choice of the discount factor is a debatable issue itself. My friend probably was not aware that his pint was well known all over the world of applied economics and finance and yet they knew how best to use Present Value method for decision making and valuation. Or, he was aware but like me was not very enthusiastic about the work effort involved in estimating the time stream of net benefits form land as a productive asset in alternative uses. Bengalis do not like hard work any way.

Recently another of my expert economist friend appeared to be of the view that available economic principles have so far not been able to provide any guidance on the type of cases like the acquisition of land from unwilling farmers in Singur. It was a great shock to me that I am fast forgetting what economics is all about. I had thought that the standard economic principles only suggest that offer and bid prices could be an effective mechanism of convert unwillingness to willingness. At sufficiently high enough price, unwilling sellers would enter the market. If the price was high enough there would have been hardly anyone in Singur unwilling to sell land to the Tatas or the Government.
I inquired if the issue is not merely one of determining that price in the absence of a free, completive market in land as a productive capital asset. And, I thought so far that the opportunity cost was a rough guide: the present value of net cash flows from land as an asset for agricultural activity is estimated easily to provide a guide and the present value of the net cash flows of the alternative land use for the Nano car project would have provide another guide. Yes, Bengali communists may not be adequately educated in quantitative economics and finance to be conversant with present value estimation and its application in a Marx-consistent manner.

Pardon the communists. During the last four years, no Bengal economist has attempted such valuation of Singur land or has explored whether the Nano car project economics could have afforded to compete land away from Singur farmers by offering a land price high enough to make all farmers willing to sell land. The notion that the industry needs to be given land at concessional rate for industry to be set up is a Nehruvian-kind of socialist prejudice that seems to keeps Indian economists away from applying simple, ideology-neutral economic principle: land should be attracted to the highest possible returns activity in the normal course. The politicians would never agree to this because they would want to dictate the allocation of assets among alternative uses based on their preferences and in the case of any communist user of State power, based on a childish, and of course fallacious, notion of democratic principle that if owners of 600 acres are willing to sale, the owners of 400 acres must be forced to sale.

The communists’ government in West Bengal has fallen. And the new Trinamool government seems to be arguing that each owner should have the right to decide whether to sell his land or not. If that is so then each land owner must first be the present value of his earnings stream over time from his asset and then get bidders to offer him attractive enough price to win over his unwillingness to sell at what the State considers as the fair price. But the Trinamool Congress government has not commissioned investigations into these economic issues that would have made it more educated and informed as a party to deal with economic problems of the State. Political parties cannot be expected to know that there is need for knowledge of economics truth and facts to arrive at proper policies.
Maybe economics is not a subject for study for emotionally argumentative Bengali intellectuals and politicians alike.
My friend pointed out to me that one basic problem of applying conventional present value method to find the value of land is that private valuations are heterogeneous and
often greater than market valuations. So, if someone is unwilling to sell land just because his personal valuation is greater than the compensation that is being offered based on the market price of similar land, should we force him?, my friend asked. He also asked, more important was whether should we force him to sell his land because most others have agreed to sell their land? He believed more firmly in the sanctity of private property. He is now convinced that we cannot ethically force anyone to sell his land or any other property for that matter.
I was amazed that both of were in agreement on the ethical issue that we should not force a landowner to sell his land under any circumstances that we both did not agree with the communists’ definition of majority rule of democracy being applicable here (the communists of Bengal seem to be more advanced in knowledge than I can compete with for I had thought there is only a single vote cast for each piece of land and hence the question of majority does not apply as the decision to sell or not is in relation to each piece of land: had all land been commonly owned the question of majority rule could apply).

Yet, I thought that I needed to clarify the economics point. My surmise was that if the present value of cash flows to the land owners from his land would be say X and the present value of the same land, if used by an Industrialist is Y and what the so-called market price used by
Government and political parties in the current distorted market is Z, Z is much less than X and Y is much higher than X. In the absence of the information on X and Y, the farmer is not able to make a real choice. It is quite possible that the industrialist buyer would be willing to offer a price Y1 that is below Y but much higher than X and therefore still much higher than Z. Thus my contention was that by not disseminating information relating to Z and X, we are not allowing the farmers to make an informed choice whether he / she would remain an unwilling seller at al prices, however high. If there exists some Y1 > X but Y1 X, there is a scope for settling down at a price
in between which will benefit both parties. But since X is unknown,
heterogeneous and often subjective, it would be better if we leave the
transaction to the market, that is, let the industrialist buy his own
land. The state's role here would be to ensure that no coercion takes
place.” I was happy that at least one of my friends agreed with me (perhaps because we were both influenced by free, competitive market economics logic).

But then, as always, I would still have something to add. To enhance proper functioning of the market, besides the State, apolitical economists could contribute to enable small farmers to get adequate information on the probable range of values of X and Y so that they can better negotiate. Various Kolkata based economics research institutes could have done some empirical studies in this area for reducing the information asymmetry between buyers and sellers in a free, competitive market for land. And, this is not difficult now for researchers to do such analysis on farm economics and industrial project economics. Banks have lot of information in their appraisal notes on numerous cases of farm and industrial finance. Even 4 decades ago, the journal of Agricultural Refinance/ Finance Corporation had been publishing empirical studies on the economics of agricultural operations by farmers owning and of various sizes in different locations of India. Late Prof. Ashok Rudra also did some work at that time. I wish researchers in applied economics did some empirical work on farm economics to improve our knowledge.

Another of my young economist friend gave me the following information:
1) In Grossman Hart's Bell Journal paper on freeriding, they gave some examples of contracts that are designed to handle situations like this--e.g., an offer would be valid if all sellers agree to sell at a certain price.
2) Govt. routinely takes lands for public works projects. Forming private industries by forcibly acquiring lands is dangerous. Several years back, the U.S. supreme court ruled in a landmark decision that lands can be acquired even for building of private industries. This caused much anguish and gnashing of teeth. One of the supporters of this view was now-retired associate justice David Souter, a mild mannered gentleman from New England. Agitators threatened that they will take Souter's home and build a mall and see how he would feel.

In the dissenting note in a case, the disentinmg judge had observed that the land acquisition by the Government could be supported if there was public necessity of extreme sort, continuing accountability to the public and selection of land according to facts of independent public significance.

On July,2004 the Michigan Supreme Court reversed an earlier decision and ruled that for forceful acquisition of by government, it is not enough to argue that an entity’s profit maximization would contribute to the health of the general economy.
There are so many different ways to look at the same issue!!

Note: http://en.wikipedia.org/wiki/Kelo_v._City_of_New_London
Kelo v. City of New London, 545 U.S. 469 (2005) was a case decided by the Supreme Court of the United States involving the use of eminent domain to transfer land from one private owner to another to further economic development. The case arose from the condemnation by New London, Connecticut, of privately owned real property so that it could be used as part of a comprehensive redevelopment plan which promised 3,169 new jobs and $1.2 million a year in tax revenues. The Court held in a 5–4 decision that the general benefits a community enjoyed from economic growth qualified such redevelopment plans as a permissible "public use" under the Takings Clause of the Fifth Amendment.
There are so different ways of looking at the same issue depending on the context of time, location and envirnment.

Market for & Externalities in Consumption of Education Equality/ Equity Products

God, according to a simplistic interpretation of Adyavat of Santana (now referred to as Hindu) Dharma philosophical scriptures of ancient origin, is all prevalent, exits in everything - infinitely large or infinitesimal - that is there in the Creation that we know, discover and imagine, and is container of everything. It follows that each and everything is nothing but God and each and everything is equal and there is nothing iniquitous in this Creation or the Creator, irrespective of whatever we believe in as the origin of God.


Yet, physically each infinitesimal entity is not necessarily the one and the same thing as the other entity as we perceive from our senses: many things look different, tastes different, behave differently and interact with each other differently. This applies to human beings as well. But human beings urge for equality and injustice, especially if one happens to perceive that one is unjustifiably handicapped compared with others. So, there is demand from the God to make every thing identically equal. God has not cared to listen to these prayers and different things continue to maintain their different identities in terms of length, width, area, volume, force, capabilities, attitudes, mentality, tastes and preferences, etc.

This is a great problem. The religious leaders and spiritual leaders have tried to promote the concept of universal love to remove all perception of differences, inequality, inequity and distinctions: ignore the formal difference and love everything as being equal and part of the same identity of God. This makes people to believe and practice the knowledge of Unique Singularity in everything and forget formal differences. But these preaching have failed to ensure equality and equity in the world of individuals, groups, societies and nations. The scientists have not given the humans a technology that would ensure that from a specified date in future all human beings will be born as identical human beings in all respects and remain so throughout their uniform life: that would have ensured that after a later future date there would not be any scope for distinction between men and women, between higher and lower IQ, between tall and short, fair or dark skin, and so on. Because a single compulsory dose of medicine served at birth will ensure that the child could produce during its life time only x number of children without any need for sexual cooperation and all children produced by the medicated children at birth will be of identical configuration without any influence of parentage and genes. So, the medical solution to equality and equity in human race is not yet available.

But the cleverest of the human race, the politicians have found a great and sustainable business of distributing equality and equity. For they understood clearly that the demand for equality and equity will be the only permanent and perpetual: the want for equality and equity is essentially insatiable. If one gets to eat a sweet, delicious fruit, one will demand for another and after consuming the second will demand yet another. But the law of diminishing marginal utility will set in at some stage when the person will stop demanding another fruit to eat. Rather, the person will demand different item of consumption. Unlike this, the utility from consumption of the item called equality and equity is not afflicted by the law of diminishing returns. It is rather under increasing marginal utility rule.

Let us consider a recent example. The Government of a State made education from primary to higher secondary to college and university education completely free for students from poor families with income below a minimum cut-off level. People were all happy - a great decision by the Government, unlike the unchangeable, rigid God. This government produced good of equality and equity in education has a positive external effect: more educated people is expected to provide a better social and cultural environment besides contributing to economic growth by supplying more productive educated labour for industry, agriculture, trade and industry as also creating in the process a greater demand for all other goods and services in the country. Unlike the other method of generating equality/equity product through reservation of seats in education or jobs that reduces the supply of school/ college/ university education seats to the non-poor students and thereby leading to an external negative effect on consumption of equality/equity goods produced by the State, the direct supply of equality/equity goods through what some economists called entitlement / endowment/ empowerment approach is liked by both the direct consumers of the goods (the beneficiary students and the poor families they come from) as well as the others who has to procure the same education good at a cost besides giving taxes to the Government to fund the free distribution of education equality/ equity goods to students from poor families. Everyone is happy.

But the consumers of education equality/ equity goods demand more such goods because the consumption of these goods exhibit increasing marginal utility. Even after primary education was made free, many students from poor families did not regularly turn up at the school. So, free mid-day meals for students attending the school improved the quality of the education equality/ equity product and consumption of this product increased.

As soon as some students from poor families were promised free education at the university / college level because they scored very high marks in the Higher Secondary Examination, it was not only welcomed by all but some demanded an up gradation of this new education equality/ equity products. It was pointed out that these students are essentially of quality of students from rich families but will still suffer a handicap of lower nutrition food intake: so they need to be provided with the same food as the students of rich families get from their parents. Financial grants to such students would help improve the quality of the education equality/ equity product in university education.

But soon it would be realised that these poor student scholars with free university tuition and financial aid would still suffer a handicap in that they would have to face the consequences of family problems related to illiteracy and inadequate awareness of their parents as compared to the educational and financial strength of students coming from rich families in the cities and towns. For example, the richer students could afford special coaching by paid private tutors, personal computers and Internet connection at home and air-conditioned rooms at home along with more knowledgeable parents' help. So, the demand would be for free supply of computers, Internet broadband service and special coaching facility as part of the education equality/ education product. Problems would still remain to be solved: the poor students need to be supplied with knowledgeable parent-like loving guardians at the university and hostels so that they have a level playing field to compete with brilliant students from rich families in cities and towns.

Extending the same kind of logic, there would be demand for school children from poor families in rural areas to be supplied with rich pairs of adopted parents with proper educational backgrounds. The equality/ equity product improvement will have to be extended to parental gene levels. All engineering colleges have to become of equal standard Indian Institutes of Technology, all MBA schools have to be of the same quality Indian Institutes of Management, and so on.

The demand for improving the educational equality/ equity product will be never ending as the marginal utility from consumption of these products are characterised by the law of increasing utility. Governments, especially democratic ones, will have continuous growing business in selling these products at the cost of the tax payers. Equality and equity will improve as a result: but will the quality of education outputs improve?

Recently, I heard a few learned people discussing about international equality/ equity in teachers' promotion system in universities. A former Indian bureaucrat currently teaching in government funded private management institute complained that Indian teachers in Indian centers of higher education with record of publication in international / foreign journals get higher scores than those Indian teachers who publish their articles in Indian journals. This according to him and some others was discrimination against one's own country and probably reflected the mentality of slavery to the foreigners. Everyone knows that Indian research journals have not been able to get international recognition of their quality simply because international scholars do not find it worthwhile to publish articles in Indian journals. But the State has not been able to figure out how Indian scientific research journals can become accepted by the international community of researchers. So, there could be a demand for education/research equality/equity product that would remove the handicap the large section of Indian teachers who cannot get their papers accepted by internationally recognized research publications vis-à-vis the small section of teachers who can. What could be the essential design features of such a product by the government? One product could be like this: a special financial reward for each publication of any teacher/researcher in internationally recognised journal if that article is followed up by another publication in internationally recognised journal, which is co-authored by an Indian teacher employed in an Indian education/research centre who had not earlier been able to publish any article in an internationally recognised journal. The provider of the education / research equality/equity products, namely the Governments of poor countries surely should be highly innovative in designing such products, given the immensely high business potential in these countries for these products. But will the quality of the talent pool of Indian teachers and researchers improve as a result to bring India to the frontiers of education and research in at least some fields of knowledge that the World is pursuing?

Amusing & Amazing Tolerance of High Inflation

India has witnessed roughly 10% annual inflation in retail prices for the last three years. That would mean the same consumption basket costs about 33% higher now as compared to three years ago. This should have caused poor people to starve and some of them to commit suicide, thefts, lootings and crimes to increase sharply, low middle-class households to come out on street for continuous protest rallies and governments to arrest hoarders and release stocks of essential commodities to poor people at subsidized prices. Nothing of that sort has happened so far. There have been occasional leftist political party meetings where they blamed the Union Government for the high and continuing inflation. The major opposition party is just announced anti-inflation protest rallies in different parts of the country just as the five states go to assembly elections in the next two months. There have been sporadic articles in newspapers and glossy weeklies decrying the inflation and highlight the sufferings of the common people. The TV channels still find their regular entertainment programs and other news analysis programs getting higher TRP than coverage of inflation news and stories. In sum, there is no sign yet for serious anti-inflationary agitation by the common people gathering momentum. This appears to be an amazingly higher level of tolerance on the part of the people – a behavior no one seems to be interested in explaining...

Four candidates may be willing to accept and share the responsibility of shaping this odd common people’s insensitivity to sustained high inflation rates. But politicians and economists are unwilling to give them any credit for shaping common people’s neglect of the inflation issue. These candidates are: (a) the common people have been able to increase their money incomes adequately enough to approximate the price inflation rate and the inherent money illusion among most people, (b) they have been able to alter their consumption basket in a manner that the revised basket is just about equally satisfying but costs significantly less than the original consumption basket, (c) the political parties have been so busy doing other things in the Parliament and outside (including stalling the sessions) to deal with corruption, with court cases and judicial activism that affect political parties, with fear/ threat of terrorist attacks and with intra-party squabbles, and finally (d) common people have realized that the stronger the anti-inflationary agitations and rallies, the lower is the likelihood of inflation rate coming down substantially and quickly agitations: rather, such agitations may only stoke the inflation further instead.

Take the above candidates in the reverse order now to assess their claim. Take candidate (d) first: it would be difficult to find real evidence in the last five decades of strong anti-inflationary agitations and protests really resulting in lowering inflation in any significant way. People may now be more willing to strengthen their capacity to live with inflation rather than wasting time on agitations. Fortunately for them candidate (c) has allowed them to concentrate on this strategy: It is easy to notice the contribution of the political parties to help the people increase the tolerance of inflation... They could correctly assess that the political leaders could gather more popularity and greater publicity by debating issues of corruption, secularism and terrorism and by engaging in intra-party fight for dominance than by organizing anti-inflationary public agitations against the Union Government. They could also sense that the common people are not yet really complaining because till now the first two candidates have also played a considerable part to enhance the people’s ability to endure high inflation in prices. The opposition political parties may also been afraid that anti-inflationary agitation can also boomerang against them as they are running Governments in States who can be accused of not taking those of the anti-inflationary measures that State Governments themselves can take. For example, some State Governments are not willing to reduce the duties they levy on transportation, transport fuel and essential consumption goods as also not willing to allow more competition in the trade in food items.

Now, explore candidate (b). Are common people continuously changing the composition of their consumption baskets? As prices rise along with rise in money incomes, households may have been trying to experiment with addition of new items in the basket giving up some consumption of existing items. For example, people may be spending less on physical travels and letters as communication over mobile phone has become drastically cheaper. When onion prices shot up, many people may have just skipped onions for a month or so. When vegetable prices rose sharply, they may have reallocated their consumption of vegetable Kilograms in favor of the cheaper and lighter ones that are filling but not as much tasty. More energy efficient, durable lamps are being used to save on electricity. Households may be saving on consumption of LPG to save on cooking time and allocate more time for the entertainment channels on the TV. Certain things people consume in terms of numbers like two pieces of sweat meats or two pieces of cut potatoes in the vegetable curry or two chapattis – the individual continue to eat them but they are now of smaller sizes. The distinction between rich man’s vegetables / fish and poor man’s vegetables/ fish is fast disappearing: households now have shifted in favor of a larger variety. Bengalis now think paneer massala a great dish and alu-pataler curry is not a daily must now. Many have shifted from Rui Fish to Katla Fish and as Katla’s have become costlier, some other fish have become relatively cheap. Change in relative prices resulting from greater play of market forces in different seasons are being used to minimize the impact of inflation through continuous changes in consumption basket. Many people have shifted to tea without milk. Medicine prices and doctor’s fees have risen: people are just going to chemist shops and buying OTC medicines - saving on doctor’s fees. While in terms of nutrition and volume the food basket has shrunk but people may be enjoying greater satisfaction from the increased variety. There is no point in giving more illustrations. Everyone knows how they are changing the composition of consumption basket so often in response to both rise in the average prices as also the change in relative prices of substitutes and complementary items.


But candidate (b) could not have played its role effectively in the absence of candidate (a). How far has money incomes increased? For the Government pensioners, pensions have increased substantially – they are even saving more than what they did when they were working. Workers in many organised sector across industries including banking, insurance and other financial services and bulk of the teachers and government funded education service employees, have their salaries indexed partly or fully to inflation. The 6 lakh+ household with employment linkage with the Indian Railways have got an average pay rise of 95% in 2010.The MPs got about a 100% rise in their incomes. On their savings, they have been earning 7-9% interest from banks and post office fixed deposits. The effective rates of tax on their incomes have gone down. The people covered by the Rural Employment guarantee Scheme have seen an increase of 16%-25% increase in their household incomes. Those who are not covered under the 100 days guaranteed employment are also benefited by 16%-20% rise in wage rates as a fall out of the Scheme and continued high level of activity in housing and infrastructure construction. The workers in the entertainment industry, especially the artists/ actors/ anchors, journalists have seen a substantive jump in their earnings - ther are mostly from very low and middle income households and have shifted to higher middle income brackets. Many of the high-salary IT and IT-enables Service sector's young employees come from poor families and they have lifted their households from wretched conditions and have been able to protect their households from the adverse effect of inflation.

Despite the high official rate of unemployment at over 8%, the number of employees per poor household has increased. The mid-day meals in schools despite the inefficiency and leakages contribute to additional income spent on food. The rickshaw pullers have been able to get at least 16% rise in the rates during the last three years. The barbers have got at least 20% increase in hair-cut charges. The man who pumps air into your car tires has got a rate hike of at least 30%. The electricians and plumbers who serve high/ middle income households/ offices in cities and towns have increased their rates by 25%-40%. Domestic help wage rates have increased substantially, Car drivers have been able to get a hike of 25%-33% rise in their emoluments in the last three years. In many rural areas, women have formed self-help groups to raise their household incomes through various kinds of activities like commercial farming of flowers in high demand, animal husbandry and poultry, etc. The constancy in railway fares and the host of concessions in the system as also the near constancy of LPG are effectively a rise in real incomes when the general price level is rising. Bicycles for girls students, more and speedier trains, better and wider network of roads helps improve the overall productivity of the poor people as they get more time to earn a little extra. With rising money incomes, middle class develop a money illusion and reduce the percentage allocation to food and start buying manufactured products whose inflation rate has been around 5%. True, there would still be households whose income have remained virtually constant and they are the worst sufferers. Where are those people located and how the government is reaching them subsidies is not known. There is no transparency or clarity heare. Inclusive growth requires direct cash subsidy to protect from the adverse effect of price inflation, those with fixed incomes at low levels. Where are they and how are they dealing with inflation? No one specifies them: only the middle income people with various opportunites may be complaining.

If the GDP grows at 8%, an inflation rate of 10% is more tolerable than when GDP grows at a 4% or 5%. Should India give priority to raising real GDP and employment growth or to reducing inflation rate to 5%? Should India try to find out what really has happened: with the massive subsidies on fuel (cooking gas, kerosene, transport) and redistribution on income and wealth through rural employment guarantee and loan waivers, has the post-tax, post-subsidy real income distribution has protected the poor from the high rate of inflation? India will not consider these at all. Because Indian economists and policymakers never question their age old beliefs – effective real incomes are always distributed in progressively more skewed manner when both GDP and inflation rates are high. That is the most amusing part of economics and economists in India.

Dear, Competitive Vegetables

Worldwide, non-vegetarians are turning vegetarians in increasing numbers. Vegetables are turning very dear because of this and also because some non-vegetarians are eating more of meat. Urban Indian are complaining of galloping, multifold rise in the prices of vegetables even as the Finance Minister of India has lamented the other day that Indians lost one winter season of fresh vegetables with decline in prices. No one seems to be able to explain why and how poor vegetables all of a sudden and rapidly became rich, high net worth articles in terms of market valuation. Even fish and mutton or eggs are unable to compete with vegetables and fruits in the competitive race to secure high valuations in the market. A Kilogram of vegetable or a dozen of some fruits now command more premium than a share of many listed companies. Just find out how much it costs to get a dozen of lemons or a kilo of green chilies.

Do not worry. Gracefully accept the emerging future: high priced vegetables are here to stay. Cereals, pulses, cooking oil, fuel oil, meat, eight-hours of unskilled work effort cannot become dearer keeping the vegetables and fruits lagging far behind. Do not expect vegetables and fruits to come within your reach: you have to raise your income to reach them. Or, cut your expenses on mobile phone calls, entertainment, electricity and fancy wear to eat vegetables and fruits in quantities you consumed before. Do not waste vegetables: if possible, grow them in your roof-tops, terrace gardens, balconies and backyards (if you still have them).
Government will be able to do very little to bring vegetables back to their poor status. To know the reality facing you ahead, read on.

Adverse weather conditions like absence of rainfall affected vegetable crops in some pockets. This may be a small reason why vegetable prices have gone up and remain at higher levels than a year ago. Future weather is unlikely to be adverse for vegetables every year.

Vegetables are now in intensifying competing for space to grow: they need higher prices to retain space, survive and feed us. Land for vegetable farming is getting progressively scarce as more remunerative alternative uses are taking land away from vegetable crops: flowers, poultry, fodder for cattle, residential houses, roads, rail tracks, factories, hospitals, schools, government offices are more remunerative to snatch away land from vegetables. True, all lands are not suitable for vegetables: but those lands where vegetables grew so long are being attracted away by flowers and other alternative uses. Prices have to rise to get vegetables back their competitiveness relative to alternative uses of land. But this may be just one reason why vegetables would be dearer to you.

The larger an urban or city area grows, the larger is the amount of vegetables that the area demands but greater is the distance from which vegetables have to be transported to the urban kitchens. Greater distance means higher transport costs and there is no way the World can avoid secular rise in petrol, gas and diesel used as transportation fuel. This again is a small reason, but a permanent one.

The ‘marketable surplus’ from small vegetable growers are going to dwindle. The wage rated for rural labor is on secular rise, especially after the Rural Employment Guarantee scheme has come into existence. The wage rate under this scheme is now indexed to inflation. The poor households who now be having higher and higher money incomes will improve their food in take including the intake of vegetables, thereby leaving a smaller surplus to be sold in the market. But this is also a small reason and may turn out be permanent. Who would mind if the poor people in the interior villages with some access to land to grow vegetables for their own consumption, have cheaper vegetable-based square meals a day, but people-friendly city/ town-based politicians will organize demonstrations against rising prices of vegetables hurting the millions of poor people in the villages.

Vegetables are perishable products in general, although some can be kept in cold storages for long (cabbages and potato for example) and refrigerated for a few days. The use of these facilities will reduce wastages as also even out the supplies over a longer time. This will in turn reduce the difference between off-season and peak season prices. But carrying and refrigeration costs will add to the value of vegetables that has to borne by the consumers.

Vegetables can be air-freighted at fairly low cost from Bangladesh, Thailand, Burma and Malaysia. This will increase supplies. But who will organize this. There does not seem to be traders with this kind of entrepreneurial ability. The customers authority and politicians out to protect large (not income tax paying) domestic vegetable traders transacting only in cash. Even if they take up the job of importing vegetables, the local politicians will ensure that only a few selected traders control the wholesale trade in their localities. So, they will keep their margins high because of the absence of competitive markets. And, they will increase their margins whenever the local politicians increase the unofficial tax/ royalty they extract from the traders. Vegetable retail chains like Reliance, Spencer will not be able to compete with them. Politicians will never allow entry of corporate houses to invest in a big way in vegetable trade and retail chains and let the country gain from higher productivity, lower wastage, greater preservation and lower costs that they could achieve in a competitive vegetable market regime. The existing localized trader oligopolies will continue to color the vegetables green with harmful chemicals causing injury to the health of the citizens. Even such vegetables will have to be bought at higher prices. This reason for vegetables to become dearer may not be very small and almost certain to be permanent given the huge number of locality level politicians earning income-tax free income out of the large difference between wholesale/ farm-gate price and retail price (Spectrum and Games provide opportunities once in a while: vegetable trade provides a permanent daily opportunity throughout India to distribute huge black income in cash for millions of political-administrative mafia.

So, start growing some bonsai vegetables yourself in your drawing rooms to enjoy viewing them as you eat your dinner of cereals and pulses.

Sparkling Economy Imparts Confidence to Public Finances

The Economic Survey and the Union Budget for 2011-12 were presented to the Indian Parliament on 25th and 28th of February 2011. The Survey confirmed the buoyancy in the economy that was reflected in the economic data released from time to time in the last few months. The Government stimulus in the 2008 and 2009 appeared to have worked and the growth of output and employment has been strong in 2010-11 (April-March). The pessimists, especially the leftists and communists, who had predicted in 2008 huge job losses in India following the World’s Financial Crisis and Great Recession have now turned coat to say that fortunately they had obstructed, through their clout in the Parliament, India from further steps to globalize and liberalize markets and saved the country from disaster. The leftists and communists are just like that they change arguments to suit their need to blame others and take credit for good things as the material conditions change over time: the reason of course is that they have to show the smartness of their poor brains and lack of understanding as to how economies function in reality. Other politicians are generally equally poor in understanding economic dynamics, but they generally speak and write based on the advice the gather from the few available economists who understand economics.

Returning to more than 9% growth trajectory
With GDP growing at 8.6% in 10-11 on top of an 8 % increase in the previous year, agriculture posting 5.4 % growth, industry 8.1% and services 9.3%, the Finance Minister expects the GDP to grow at 9.6 % in 2011-12 (rate achieved in 2006-07). This seems a reasonable estimate and speaks for the inherent strength of the economy after the liberalization process began in 1991 and the Government had to stop interfering in production, capacity and price decisions in most spheres. The economic performance of the last two decades has been on the average far superior than any of the previous four decades of Government command and control regime. The rates of savings exceeded 30% and investment rate of 35% or more during the last few years – something that the command and control regime never succeeded in achieving.

Dream Showers of Revenues Pouring in
The Exports grew at a faster rate than imports in 2010-11. Tax revenues are just pouring in (revised estimate of net tax receipts for the Centre is about 28% higher than the actual of 2009-10) for 2010-11 like heavy rains to allow progressively much larger amounts of public money for ruling politicians and ministers to spend away in the name of financial inclusion, rural development, backward area development, infrastructure development, education, health care, unemployment guarantee, pensions, salaries to government employees, sports, culture – just as rich country monarchs used to do before democracy spread through out the World. The politicians are all happy except when they are in the Opposition or when as rulers they think they try dictating the economy to behave as per their wishes and the economy with no ears does not listen to them.

Inflation: Challenge to Endure?
But the Finance Minister this time has a few so-called challenges to deal with as well. The first and foremost was the high rate of inflation of close to 10%, though it has come down from 20% a year ago. He also finds it unacceptable that the differences between wholesale and retail prices and between markets in different parts of the country are so high to hurt the interests of both the producers and consumers, though he can do only little to narrow these gaps to acceptable levels: much depend how the active support of the governments in various States. He knows that that Government can do very little in substantially reducing inflation rate in the short to medium term: if the Govt. had effective powers, the inflation would not have been high in the first place. He also knows that the halving of the inflation rate in the past twelve months was more to with the dynamics of the market rather than fiscal or monetary policy which are largely a kind of placebo pills. So, with all his wisdom, experience and maturity gained from long association with public finances over the past 40 years, he did what was relevant and possible. First, express his confidence that inflation rate in 2011-12 would be much lower than in the previous year. Second, expand and/ or promote the expansion of storage capacity of food grains so that if required he could release them to stop food inflation from rising (although he knows that building up a huge stock in the last two years had also made its contribution to rise in food-grain prices. Third, take measures to raise productivity and production of vegetables, nutrient-intensive cereals, palm oil much more intensively in the past to strengthen the resilience of food supply. He knew that in the Budget he can argue for a policy for large-scale commercial farming to raise production and productivity and allow the Opposition parties to stall the Parliamentary activities. Fourth, he did not reduce the duties on petrol and diesel, keeping the option for later days if the oil prices in the international market increase further from $110/barrel as of end-February. Fifth, he tried to give some relief to the common people: (a) inflation indexing the daily wage rate for BPL workers under the Mahatma Gandhi Rural Employment Guarantee Scheme (this should in turn increase the wage rate of unskilled workers outside BPL category (it is another matter that this itself will cause vegetable inflation a little with surplus vegetable available outside rural areas will continue to get depleted (unless higher prices leads to higher productivity), (b) a relief of about Rs3 per day on income tax in general and Rs. 6 per day for income tax payers above 60 but with income in excess of Rs. 2 lakhs per year (slightly higher for those above 80 years of age) and (c) leave the fate of those who do not come into taxable range income depend on the rise in market wage rates. Sixth, he trusts that the Reserve Bank of India will be, as usual, alert at tightening monetary policy without affecting the growth of credit for productive purposes, thereby contributing to curbing inflation rate. And, finally, being a devout Brahmin worshiper, he prays to both, Indra - the God of Rains and to Lakshmi - the Goddess of Wealth to bless the country.

It is worth appreciating the rationale of inflation controlling policy of the Finance Minister. The Chief Economic Adviser has spoken about this in simple economics: "In controlling inflation at times what is needed is not more action by government but less." He illustrated as follows: for moving food from farm gates to retail outlets, licencing APMC Acts and octroi checks are applicable and these prevent new players and small farmers to bring their goods directly to the urban markets. Therefore, governments should get out of these control mechanism to allow easier movement of food to let retail prices fall as competiton among food traders intensify. The proposed vegetable clusters around urban centres would provide incentives to increase productivity closer to cities, provided all current impediments for vegetables to move easily to reach the cities. Trying to bring down prices by diktat didnot work in east-European nations and the erstwhile Soviet Union, where extensive price controls were tried: prices were low but virtually no goods were sold at those prices with people queuing up outside shops amidst acute shortages. (http://businessworld.in/bw/2011_03_05_Dont_Watch_Budget_Like_A_Cricket_Match.html)

Deficit Reduction: Easy with Buoyant Revenues
His second challenge was to reducing government spending profligacy to a level where fiscal deficit can go down as percentage to GDP. He has done this well. He has projected total expenditure for 2011-12 to grow by just 40,000 crore, a mere 3% increase over the revised estimates of 2010-11, but keeps the Capital receipts stagnant and plans to draw down cash balances by Rs. 20,000 crore. In a Budget size of Rs 12. 6 crores – Rs 60,000 crore is relatively small. And, yet allocates 24% higher to Education, 20% higher to Heath Care, 23% higher to Infrastructure and 15% higher to Women and Child Welfare. Where did he cut or curb expenditures then?
Once the fiscal deficit target is set, estimating budget receipts and expenditures becomes an easy task, reflected emphasis on containing the extent of profligacy in expenditure and some prudence diversification of risk of going wrong across various items of revenue estimates. Setting a Budgeted Fiscal Deficit in absolute terms for 2011-12 at slightly less than the Actual in 2009-10 and a mere Rs12,000 crore higher that the Budget estimates for 2010-11 makes a fiscal deficit to GDP ratio of 4.5 % looks easily achievable under normal circumstances. He has budgeted for an 18.5% growth in Gross Tax Revenues as against the estimate of 26% growth in 1010-11 over the actuals in 2009-10. For Net tax revenues, he has budgeted 17.9% rise against previous year's revised estimate of 23.%5. The over all cushion of about 7% points is large enough to withstand shocks. He has been conservative in assuming a growth in customs duty revenue growth of 15% (Rs20000 Crore) against the revised estimates of 58% growth (Rs.48000 Crore) in the previous year. In respect of Excise duty also, he assumes a lower growth of 15% or Rs 27000 crore (last year’s 33% or Rs34000 crore). In respect of Corporate Tax and Service Tax, he assumes the same annual growth as in last year (21% and 18% respectively). On the other hand, he assumes a 15.4% growth in Income taxes as against 11.9 % in the previous fiscal). In case some thing goes wrong on the downside, something may go wrong in the upside and the overall estimate fiscal deficit percentage may still be achieved. He must have cross-checked the reasonability of his assumption: the overall growth rate in tax revenues would be a real income growth of 9% plus price increase of 7% plus 2.5 % for broadening of base, better tax compliance and windfalls less relief’s granted this Budget.

Challenge of Legislation: Leave it to the Opposition
Corporate Sector should happily claim and tell the leftist politicians that they directly contribute to the Gross Tax Revenues to the extent of 38%-39%, besides taking a large burden of indirect taxes (which together contribute much less than the direct taxes). The rich people should also claim proudly that they contribute as Income Tax much more than Customs Revenue or the Excise Revenue and also contribute a large part of the burden of the indirect taxes. This should help them meet the BJP and Leftists to convince them to help the Finance Minister to meet his last challenge: the challenge of getting all reform legislation passed in the Parliament as soon as possible. The list is quite big: the dozen includes
The Companies Act Amendment, Goods & Services Act, Direct Tax Code, Insurance Laws (Amendment) Bill, Life Insurance Corporation (Amendment) Bill, revised Pension Fund Regulatory and Development Authority Bill, Banking Laws Amendment Bill, Bill on Factoring and Assignment of Receivables, State Bank of India (Subsidiary Banks Laws) Amendment Bill, Indian Stamp Act ammendmentRDBFI Act Amendment and SARFAESI Act and many of these are pending for quite a few years.

Beyond Challages
As an ardent believer of dominant Government in economic life, the Finance Minister on his own and the Ruling Government is taking many measures to enhance the efficiency of tax administration, improve performance of government department, prompt delivery of service to tax payers. He also announced government’s five fold-strategy to curb corruption including a detailed review of the systems of procurement, discretionary powers of ministers to enhance transparency and better governance of the Government as an organization. He also refrained from too much tweaking of the excise, customs and service duty/ tax rates apart from making the system move towards the objectives of achieving Asean levels, reduction in number of rates, withdrawal of ghosts of concessions and conformity with the requirement of GST. He has also be soon introducing direct cash subsidy to food purchased by BPL households from the market instead of continuing with the inherently inefficient, wasteful and corrupt public distribution system. The Chief Economic Adviser, Kaushik Basu, has explained the logic of smal, small pieces of efficiency enhancing reforms in simple economics. "The system proposed in this budget, and to be worked out by the Nandan Nilekani committee, will allow us to hand out a smart card or kerosene coupon to the poor. The poor will then use this to buy kerosene from the market at market price. The poor still gets the subsidy but since they pay the shopkeeper the full price for kerosene, the shopkeeper has no incentive to turn the poor buyer away and sell the kerosene elsewhere. A huge amount of the leakage can be checked by this new mechanism." He also gave another example of improved governance proposed in the budget. "Indian exporters cannot compete with exporters from China and Singapore, not so much because of the prices and exchange rates but because our customs procedures are so complex and time consuming. Sending goods from the factory gate in India to the New York store takes about double the time that it takes from a Chinese factory gate. The proposed self-assessment for customs announced in this year’s budget will enable exporters to save a huge amount of time. The system will run on trust with a few traders being randomly picked and scrutinised. This increased efficiency can have a dramatic effect on our exports and the current account deficit." He also demolishes the usual foolish arguments of the adminstrative raj in trade system. All exporters and importers may not be totally honest. But random checks and severe punishments to the guilty of dishonesty, would be incentive enough to be honest (the American income tax system is run entirely on the basis of random checks} The poosibility of bribing out of punishment will still be there as it is now. The self assessment system with custms offices available for clearance round the clock, instead of fised working hours now, would speed up the process of trade and contribute to competitiveness of Indian businesses as total savings of transactions cost could be very large.

Good job done by the Finance Minister – he has been transparent and frank in admitting that some challenges of the economy cannot be solved unless all political parties are open to discuss based on logic and arrive at solutions through discussions and compromises at a faster speed.