Is RBI handling inflation correctly?: Part 1

Nowhere in the recent economic history of India, has an issue that is so well debated and polarized as the inflation/ overheating debate going on India circles. Now, the question has changed slightly from "is India overheating" to whether Indian central bank (RBI) is correctly handling the overheating. Inflation has spiked from around 4% to over 6% now and RBI has recently gone through a round of interest rate hikes that pushed the interest rates from around 7% last year to over 13% now. Simultaneously, it has hiked the reserve rates (that will prevent banks from giving more loans) and allowed the rupee to appreciate against the dollar. As the stakes in Indian economy are growing bigger and bigger, different parties are taking sides on what are the implications of the policy. The market has voted with its foot by crashing the Sensex (it has recovered partly though as i write this) and analysts have smashed the policies. I myself have written a couple of articles arguing against the RBI's policy. Here, I'm giving the other side of the picture. So, what is happening and what will be the implications on various parties concerned - Indian poor, middle class, corporates, exporters, government, foreign investors?

Great Indian Growth:
First, what is happening? India is on a big boom cycle since 2003 and a lot of people have come to begun that the time has come for India to get to the center stage and rightly so. The growth rates have gone up over 9% from a dormant 6% rates 3 years ago, and the efforts of reforms during the previous regime is finally paying off. The fundamentals look good - a nation with atleast 250 million people with reasonable spending power, a vast network of well bred universities (atleast 25 of the institutions are now in the elite category, including the IITs, IIMs, AIIMS & IISc), a great history, center of major trading routes in Asia, and a vast network of expatriates providing free diplomacy and act as conduits for knowledge and economic exchange. India is simply in the best possible position for development, so far, and here is the link for India's scorching growth prediction.

Oh no... not so soon. However, too many things happened and the growth was simply too fast for the system to handle and the overheating signs have been showing its ugly teeth now. 6% core inflation shows nothing and honestly, I believe the RBI doesnt care as much about that. What is dangerous is a precarious position in asset markets. Indian infrastructure and housing development, along with even good corporate stocks, couldnt withstand a sudden barrage of this huge money flood. House prices in Indian major cities have gone up by over 300% in 3 years, stock index appreciated over 300% in the mean time, real-estate and commercial property have gone up by over 5 times in a few places, and all these dwarf the 6% core inflation rate that is mainly showing global inflation in commodity prices. And all these were fed with cheap credit, and loan growth is at a dangerously high 30%/year. The condition is really risky now.

Indications of overheating:
Housing: Rocketing house prices where people are willing to pay $200,000 for some second-grade apartments in not-so-good localities when the country's per-capita income is just around $1000/year is definitely a scary sign. To put things in perspective, in Seattle (the home of Boeing, Starbucks, Amazon and Microsoft) good apartments in nice localities can be got for $400,000 when the median household income is over $100,000, and people fear overheating here! So, the hard-earning middle class is priced out, while a lot of people have dangerously accumulated huge amount of loans to buy white elephants. In the last 1-2 years RBI has issued a lot warning regarding this situation, and asked banks to cool down housing loans, but banks have not turned their ear to it.

Real Estate: Its not just the houses that are too expensive. Commercial property is an unexpected peak where shady locations in Bombay and Delhi seek prices that would shame even Manhattan. This has affected expansion plans for many hotels (nation of India has less hotel rooms than the city of New York), many companies are holding their plans to open offices in Mumbai and Bangalore, and even retailers are affected by this skyrocketing prices. At some point the cost of doing business will cross a tipping point, and India will no longer be a favourite service/production outsourcing even with low wages, if we dont address this real-estate quandary.

Stocks: And the stock markets have been affected by this irrational exuberance. While the fundamentals are definitely good, the prices (in terms of P/E ratios) are really high for an emerging country, enough to price out many serious investors. And a lot of investment is in the hot-money section (foreign institutional investors and domestic buyers trading on margin) that could vaporize at a degree above room temperature. While, a good stock appreciation encourages the corporations to expand more, over-appreciation and over-hype could cloud us on crucial things like efficiency and cost-management, and over-paying on unworthy assets like what the Japanese did in 1980s. It is time for some correction to more moderate levels (probably around the 10-11K region in the Sensex).

Savings: For an Asian country, India's saving rate is not impressive. While, the Europeans and Americans have social security and good nets (comparatively) and the Asians have good domestic savings, Indians have neither. India is on a complete blow-out cycle, learning to spend from the Americans, before even they have learnt to earn from them. Personal credit growth is rocketing, and unlike their previous generation, people are not afraid to go on big loans for flat-screen TVs and unaffordable houses. Automobiles are overcrowding before the roads are even built and Indian researchers are worrying more about obesity and cholestrol than hunger and poverty! Indian domestic consumption as visible from rocketing non-oil imports have also caused the current account deficits to zoom (imports much greater than exports) inspite of a healthy growth in export industries like IT, Auto, Pharma and Chemicals. Indians are currently just over-consuming and a developing country cannot afford to have deficits for long.

Thus, the current overheating, if left unchecked, could rock the Indian boat and the Japan's painful experience from over-exuberance in 80's and America's experience in 90's should not be forgotten. Brimming prices of Housing, stocks, commercial properties and runaway loan growth has already given enough indications that the supply-side pressures from agricultural commodities, oil and metals are just an excuse for the inflationary pressure. RBI has got nothing to do with these latter things, and the solutions are pretty simple and are with the government: Liberalize sectors like power, mining and agriculture and you would see the same benefits. But, we are not arguing about these core principles for now, and RBI with its monetary stick is tackling the runaway overheating than core-inflation with interest rate hikes. Commodity inflation is just a pretext for RBI to pull the government to take action (governments are the biggest beneficiaries of inflation and low interest rates, as they are usually the biggest borrowers). If RBI is even half as intelligent as I would assume them to be, they would know that monetary policies cannot control commodity inflation (no one is going to stop eating food because you increase interest rate by 0.5%) and so it should not be a secret that the recent measures are more against over-heating fears than CPI per se, what many analysts assume it to be.

In the next part let us see, how the current measure are enacted and in the third part how it will individually affect the various players in the game (including us).

(This article has been included as an Op-Ed in Asian Development Bank's E-Newsline)

Mr. Smith goes to Washington

Whenever I think a movie was the movie I've ever seen, there is something sooner or later, something even better comes and surprises me with ingenious film-making. Life is Beautiful, Schindler's List, Saving Private Ryan, Shwashank Redemption, It's a Wonderful Life... the list keeps growing. Now, here comes a movie that I believe one of the best ever I've seen. I know a lot of people might not share the same passion as me for this, as it is about democracy and America, still not as much appreciated by many people. But, Frank Capra and James Stewart will not make anything less than an extraordinary movie. And Jean Arthur caps it like a cream of the cake. And, Harry Carey who acts as the President of the Senate brings a highly respected and esteemed impression for his character, though he is not properly credited for this.

The film is about how a young, simple minded Midwesterner from Jackson city, Mississippi is selected for the American senate to be a honorable stooge of a corrupted businessman to replace a recently passed-away senator and how he fights the very own corrupt machinery that had engulfed the principles and ideals of America. The young man (our great James Stewart of "It's a Wonderful Life") loves and believes every patriotic ideal and adores his fellow senior senator and all gungho for this great job of law-making for this world's greatest democracy. When he first sets foot on Washington he loses his mind just watching the Capitol dome and loses time in the great memorials of Washington and Lincoln. His innocent mannerisms and plain patriotism is initially ridicule and mocked at by all those whos-who of Washington and even his secretary Clarrisa (the lovely Jean Arthur) is initially annoyed at baby-sitting this "cocky" new Senator.

The senator has visions of building a great boy's camp in his own state to teach and grow up boys with American ideals, but little does he understand that his bill to create this national camp is on the same land where the corrupt Mr. Taylor works up the nation to build a dam for his own interests. When the interests collide, Taylor tries to break up our man with allegations and when our hero has almost lost, he rises up extraordinarily using the Senate provisions (that allow for filibustering) and makes up his case. You have got to watch this, as I don't do justice for this great act, by explaining all this in a sentence.

We have all seen such stories where a lone man fights for a lost cause among the villains backed by politicians, their stooges and businessman with deep-pocketed connections in the press and other public media. But, this movie is extraordinary and puts America both in a positive light and also points out to its deficiencies. It points out to the concern of how the different estates of public sphere - lawmaking, business enterprises, media and the executive machinery have to be independent and impartial. It reminds people of their responsibilities of this democracy in selecting their representatives and keeping track of the various estates of the society. If people are not going to pay much attention to politics then the corrupt elements will, and instead of representing the will and ideas of the people, the government shall represent the vested interests of the few. Then politics and Presidentship will not be decided in the fields, factories and offices of the common man but at the expensive cocktails, conventions and conferences in New York, Chicago and Los Angels. What is said in 1939 is even more true today, when America is more and more becoming plutocracy far away from the dreams of its creation in 1776.

And it reminds the people of the great dream of its forefathers - the visions of Jefferson and Franklin in the declaration of independence, the Philadelphia bell and Statue of liberty standing to represent the freedom and liberty to all men and women, the words of Lincoln that urges us in protecting the sovereignty and maintaining democracy and the Washington memorials that stands tall to represent the ingenious ideas of this young nation. The singing of star spangled banner (the national anthem of US) during the senator's election and dramatic portrayal of various symbols of American entity is simply wonderful in this movie.

I hold a lot of personal emotions for this movie in that it points to what we have lost in politics. I always get emotional when I visit the great memorials of the Washington, the great Washington's pillar, the majestic statue of Lincoln, the great World war memorial and most importantly the capital dome viewed from the Union station just out of Amtrak, from the air taking off from Reagan airport, and from every road leading to it. It is the place where laws are made that governs the working or atleast affect it for most parts of the world. Seldom do people understand how important an institution it is, how much they really care to affect it.

We, the common people, have shrugged from our responsibility towards politics and treat it like a nasty art little realising that it is the thing that moves and works us. What is true for America holds true for most other democracies including Britain and India. Back home in India, we have left politics to rot. The great halls of Rashtrapati Bhavan where doyens like Sarvappalli Radhakrishnan and Abdul Kalam have grazed their presence, is just a ceremonial entity that overlooks a chaotic Sansad Bhavan where goons and criminals represent us and enact laws for us. More than the Americans, we have shrugged our responsibilities to elect responsible representatives for the nation and then just bitch about the poor state of the nation.

I wish movies like these come in India and other democratic nations, and more people get into the working of the beautiful web of democracy.

Hour of National Shame

As the day started on Friday, there was a flurry of activity in our entire campus and sitting at Building 1 of Microsoft's headquarters I didnt have to guess too hard for the reason. It is the India's world cup decider. The desis were moving all around, made all the cafeterias and building lobbies to beam the cricket matches and few conference rooms were totally dedicated for the telecast, people were paying $200 at home for a dish subscription for the series, all the 100+ cricket teams in the campus were busy trying to "learn" from the "masters"... all this to much bewilderment to the non-desis most didnt know what this game is about and people like me were taking great joy in explaining this mediocre game to his Ukrainian office mate. By, afternoon the "campaign" was history and everybody returned back to work in great disgust, agony and shame and our internal mailing lists were flooded with patriotic Indian slamming their lousy team.

In all this, I wonder should we still place much importance to this game, where a water-boy of a third rate team of a game played by less than dozen scattered countries part of a long-dead colonial empire make millions at the cost of his poor fellowmen from the shanty villages and congested cities.

Make no doubt, I am (atleast was) a huge fan of this game and there used to be a time where I used to watch every game from the English County season to Duleep and Ranji Trophies, leave alone things as great as ODIs and Tests. We used to play in the street (and get scolding from homes where we hit the balls into) after every match and used to passionately discuss our hero’s techniques. In the train commute and school, we used to play book cricket, sponge cricket and a dozen other innovations including word games and used to remember every possible statistic about those "heroes" much before internet or cricinfo came. We used to call Vaas with his full name - "Warnakula Pettabente Ushanta Joseph Chaminda Vaas" and celebrate Apr 24 with great pomp.

If I say cricket was a passion, it would be an understatement. It was much more than a religion for us and for years in our secondary school, we couldnt think of an hour we lost track of our gods. We watch matches with passion, then follow the highlights and analysis with even more passion and then wait for next morning newspaper to read every word about what each and everyone think about the game. It was a way of life for us. We used to get up at 2am for the New Zealand based matches and go to sleep at 4am for those West Indies based matches.

And for most Indians - from those poor villagers to army men to auto rickshaws to every common man in the street, cricket is not as big a concern for them as a sport much as much as the patriotism for their nation; they dont care whether Aussies win their Ashes or the South Africans gave their big chase or how classic Lara hits against England. For them India is the dream and Indian matches are their carnival. They dont care whether the batsman keeps the bat straight and hits the drives in the "V"s or whether the pace bowler gets outswing at good length outside the off-stump. They only care whether the batsman and bowler wins for them.

I cant forget the spectacles when I was traveling Calcutta when "dada" was tormenting the lankans at Tauton in WC1999 looked liked as though hanuman was burning the streets of Lanka. And when Tendulkar hit the 143 against the Assies in the pre-Birthday game in 1998, people were wondering whether the storm was from the desert or from the Tendy's bat. And we had nice laughs when Sidhu was in full form saying "Drown a lucky man in water and he will come back with a fish in his mouth" during the legendary Natwest finals with Yuvraj and Kaif. How many can forget the Tendulakar's golden arm in Hero cup match against South Africa, the legendary finals in 1983 that I would have watched a dozen times, the Titan cup splendor when two great nations - SA & Aussie were subdued with great pomp following the winning of a dirty trophy named Gawaskar-Border Test trophy against Aussies. Or how about Ganguly's legendary opening series in England, Assaruddins innings in Eden Gardens and Green park, Tendulkar-Ganguly partnerships, Javagal Srinath's genuine pace bowling... I could keep adding a million more pages if ever I have to recollect what l remember of Indian cricket.

All these golden experiences are blotted by what happened later. The first disaster happened in 2000, when Cronje accepted to match fixing in the Ind-SA series when India took the ODI series and SA took Test series. I wrote a couple of articles to letters to editor in 1998 about match fixing, but never though things would be as ugly and never thought Jadeja and Azar would be a part of it. It was a deep pain for me - as I watched through all the matches even during my crucial board exams and this was a treason to me. Cricket never looked the same like before to me, and even though I watched a lot of matches including the Sachin's power pack against Pak in last world cup, things were never the same.

Even then, as a shameless Indian I was limping to take a look at our TV in the lobby. My ligament was torn during skiing last week and with all bandages I strained through the stairs just to take a glimpse at what was going on. And what I saw was unforgivable. Its not a loss that matters. When Sachin hit that 143 against Aussie in the desert storm, no body in the world mourned for India's loss, and even Aussie's were thinking that they lost much after the match ended their way. It is the way of they play. To see a "star studded" team representing 1.1 billion poor people who pour millions into their pockets and keep in them in the same league as Diego Maradonna and Michael Schumi... making their worst ever performance in the World cups since 1975 (winning just one match against a non-test playing team) and also making Rs.163 crore loss for their sponsors... I think let-down was too small a word. It was treason.

Dear Indians, forget about this shameless team of a mediocre sport and grow up.

Should people be restricted in online media?

Fire in the stove cooks while fire in the roof kills

Should there be regulations to maintain a proper interaction in the web or should the statusquo be maintained? How many of us realize that they could be prosecuted if they write illegal content on a blog or even on an Orkut community or even an "anonymous" Wikipedia entry? If you are a girl and someone puts slanderous content with nude/objectionable pics in an online media, and totally screws up your life should the person doing intentionally or as a prank be let scot-free? If you are a lawmaker and you are seeing terrorists use online forums to recruit and commit crimes against your innocent people what should you do? As terrorists and gullible teenagers utilize the Internet for a lot of criminal activities how should the conventional society respond? Finally, has Internet made the world a better place?

This is one of the question that I was asking myself for a while and I had couple of posts in draft that were later discarded. Let me put more thoughts into this. Our conventional society has done a lot of adhoc things to stop this Internet menace but things are not enough. they either restrict too many things or lets too many things.

Consider the conventional society:
There is a minimum age for driving & drinking, there are processes for obtaining licence and only those who are qualified can drive, for getting a gun you need to be qualified, you can drive only in left/right depending on the country you are driving in, if you insult someone publicly in writing or speech you could be prosecuted for libel or slander, if you kill someone you are jailed or put to death....

When we don't have problems with conventional society having so many rules and regulations that help us mostly though gives some minor nuisance, and is a must for orderliness in the society. How much of those controls exist in the highly powerful online mediums? This is particularly important as young kids write blogs, go to social networking sites and do all sort of activities without even realising the rules of conventional society and a lot of people get burnt. They don't realize that if you create a malicious profile in social networking sites like Orkut intentionally slenderizing people, you could be prosecuted in various jurisdictions including India, China, Brazil and US. This is like giving fully loaded Machine guns to kids and punishing them when they accidentally hit the trigger. The fault lies in the society that had allowed the kids to have accessed the tool in the first place.

Internet like any powerful tool of nature has to be put in place and accessed properly to get real benefits out of it. Fire in the stove cooks while fire in the roof kills. But, I'm appalled to the lack of much regulations and education regarding preventing its misuse. No doubt, the revolution occurred too quickly for lawmakers to take decisive action. A similar process occurred in the world a hundred years ago, when automobile was invented and every tom-dick-and-harry started driving. The result was disastrous and nations quickly responded by issuing driving licences. We need similar things for the online media, lest it gets totally out of control.

Reputed service providers like Google, Yahoo and Microsoft have to take first steps and steer the direction for the community and the public should maintain a list of sites that voluntarily implements the steps and block the access to the rest from the corporate domain, parental control list etc. I use the term Internet account to mean the combo package offered by Google, Yahoo, etc that lets a range of services including email, chat, photo sharing, blogging, social networking, etc.

Some of the essential standards are:
1. Provide options for special Internet accounts with proper identification: Currently anybody (including Osama Bin Laden) could open email/blog/social networking account. This has to be slowly moved to a situation where only real persons with provable records and identification should be able to open accounts. In other words, if you need to obtain a Google account (for Blogger, Orkut...) or equivalent Yahoo and Passport accounts, you should be able to produce atleast one identification from the conventional society: Drivers licence, Credit card number, Passport number etc. This is one of the first steps in controlling spam and malicious mails, apart from reducing a lot of different spoofing and other crimes on the net. Though, it is not a cure-all medicine, it will make a lot of people think twice before they could do all those stupid blunders under the guise of anonymity.

2. Ensure licensing in accounts: Schools must start an internet education program and only those have passed them should be allowed to create internet entities including email & blogging. There must be such education and test programs across the society and the individuals wanting to access the specific tools must be able to pass a small exam that makes them liable to their crime. So, if you are kid sending a death threat by email to the President, or insult a person in a blog or create a malicious Orkut account or vandalize a Wikipedia entry you know its consequences. It might even be as bad as killing someone with a jigsaw. If we can suitable have drivers licence program for hundreds of millions of drivers across the world, I don't think why it will be more hard to create education and testing program for hundreds of millions of Internet users in the world.

There are few other steps that could be done for a better internet world, but these alone could make a good start and enable to contain the current anarchy. Initially enforcing them would be hard, but schools & governments should work with internet tool providers like Google and Yahoo to create such standards and punish those companies that don't follow the standards. A lot of governments are very concerned with Internet security and thus, most of the world will agree to those standards and only companies adhering to those standards will be permitted in a lot of school & office campuses. Eventually other companies will start implementing the standards and once most of the major providers of email, news, social networking & blogging join the common standards platform, ISPs could be pressurized to blockade everyone else, and eventually from our ISPs we will get only those websites & content that have proper legal standings. And things like Verisign standards can be extended for many other websites too. And after a while, such international conventions can be agreed upon and all these Internet content will come under the purview of the international law, instead of the current fragmented jurisdictions. And those countries and networks that don't agree can be permanently blockaded from the Internet.

The goal is to bring every Internet user, website or an Internet entity under laws and procedures of the conventional society. Like, how the world agreed upon that killing without a cause is a crime internationally, internet laws should be international standards and it will end the anarchy in the Internet world and pave the world for a better future.

Unbelievable - Where are the hits coming from?

Seeing a spurt in the daily visits (more than tripled to almost 100/day nowadays) for the first time, I browsed through the logs of hits that this site gets, and I was so surprized of the outcome. Most of incoming links are from people searching Web in Google, and only one from Google's blog search, one from another site, and no Technorati or other blog engine hits. This was both worrying and surprizing.... surprizing because Google's web search indexes my blog well and "worrying" because no blog search or web search tool is directing to my site for any query (God burn all search engines other than google).

The kind of google searches that was bringing my blog to the top of Google search was mind boggling:

1. the foreign banks which are entering India in 2009
2. about tamil language in tamil
3.CHANCES IIT GRADUATES IIM gd/pi
4.how much gift dollars indian parents children in usa

and the best:
5.rigveda molten lead would be poured into their ears

I dont have an idea of how these hits come to my site and I guess many of the visitors themselves dont know it. Seeing the logs, I found a few good readers spening some time (alteast 5 mins) reading while most had immediately closed or gone to another site. Most of the incoming hits were from XP systems with 1024*768 monitors. The statistics has so much interesting information about who (I mean which IP location) is currently reading what and when it gets wings after a couple of years, I can even cater to those people who read the article to considerable time. Right now I got a work cut out - Make a lot of articles, lot more interesting and relevant as many readers had closed the browser before reading fully :(.

Three Billion New Capitalists

I was reading through Clyde Prestowitz's "Three Billion New Capitalists - the Great shift of wealth and power to the east" that came in 2005. Like many of the books of the same era including the "World is Flat" it describes opportunities and challenges that is unfolding for America given the revolutionary changes that is occurring in India, China, Brazil & the East Europe-Russia. All these countries were warped in some kind of socio-communism till the late 1980's and (almost) everything came down with a thud with the fall of Berlin Wall. East Europe followed Germany into capitalism and USSR collapsed in 1991, India became almost bankrupt in 1991 and turned into a market economy partially due to the fact that its main export destination went down pinching foreign earning, China was forced to become a capitalist with a host of events including the Tiananmen square massacre in 1989 and Brazil became democratic with a new constitution in 1988. By now the concept of BRIC (Brazil, Russia, India, China) has become a cliché for international economists.

The globalization process started since the 15th century when Turks captured Constantinople in 1453 closing an important trade route for the West with India. So, starting with Portugal, European countries were sending their great expeditions towards India and unimaginable wealth was found in Asia, Africa & Americas accidentally. This process was accelerated with the industrial revolution and Renaissance and by early 20th century the strains of protectionism-mercantilism that came as a reaction for globalization almost destroyed the world with two great World Wars, along with producing diseases of socialism, fascism, Nazism, communism, Maoism & Fabian (India).

This time the challenges are much more than the earlier rounds of capitalism-globalization that occurred till 1980s. The players were relatively small Japan, West Europe along with the big boss - America together accounting for a population of half billion+. But, the challenges that are posed with the rise of three billion new capitalists (from India, China, Russia, Brazil, East Europe) poses totally different challenges. Of fundamental worry is the Export imbalances caused by curency manipulation by Asian countries that causing dollar to be artificially strong and posing threat to everyone in the system.

The book covers a lot of these aspects and the author puts his vast experience in government commissions and private executive boards to explain how each of these challenges unfold and how US can cope up with them. Some of the interesting observations made by the author are:

1. Linkages between various sectors of economy: A lot of macroeconomists believe economies to be working linearly and free market principles can stabilize systems in almost no-time. For example, you lose an industry to abroad due to productivity difference and this will help you to have cheaper product and eventually you currency will depreciate and cost of labor will go down and you will eventually get equal or better industry. But, a lot of cases such things don’t happen. The author gives an example of how US companies like Ampex lost VCR business to Japan, thereby US lost all the additional things like disk storage & recording etc. and Japan built its CCD industry with VCR revolution and this led to Digital Cameras. Thus, by losing one industry US lost a dozen industries.

2. Economies are ecosystems: While dealing with biological & physical systems we are sometimes so amazed and shocked how important certain minor linkages are. Destruction of certain animals/plants or loss of certain soil & water streams can break an entire system just like how faulty screws could potential bring down great machinery. While biologists and ecologists are starting to appreciate such crucial links, economists are late in the game. The author gives an example of Silicon Valley. It is not just a place of producing h/w & s/w. It is a region watered by the great brains of Stanford & Berkeley, powered by thousands of venture capitalists, lawyers, Research labs and corporations and each are important to other. The corporations need universities for talent and Universities need corps for funding, and both require capital from the VCs & investment bankers. You break one linkage and you collapse the whole system. Thus, US should be careful of what it moves offshore and should make a few industries national priorities just like how biologists designate few animals to be endangered.

3. Currency manipulation & Monetary policy: The world system has gotten to a point, where one part of the world (read: America) is mad consuming while a lot of rest of the world is mad saving. Both cannot continue forever. Over saving is as bad as over consumption like what the great depressions showed. Like fat accumulation in the body, a lot of regions including Japan & China have accumulated a massive reserve of dollars (running in trillions) and they have no sound plans for consuming them. The system is thus very precarious and small moves can bring the entire system to a thud. So, major savers should diversify their savings and move a lot of it for domestic consumption. Major economies like China should move their focus from export-centric to serving their huge domestic markets. Interesting suggestions he gave include bringing Japan into dollar zone (effectively ending currency manipulation) and work with Europe & IMF to bring alterative international currencies to reduce the burden on dollar.

4. Energy security: US is spoilt with a couple of decades of cheap oil that brought new beasts like SUVs into the market. This has put it an unsustainable situation of consumer of more than a quarter of world oil. By a combination of activities including support of energy efficient vehicles, tougher standards for SUVs and support for alternate energy sources like oil from shale, tar and ethanol should be pursued to totally eliminate the dependence on Middle east oil as world oil reserves are going to be extremely pressured with the rise of the three billion people.

5. Focus on Education: Due to the policies that centered on baby boomer generation, US education is in a state of deep shit. There was a time when people could land in life long good employment with a mediocre high school graduation and such laxity has removed focus on a rigorous schooling curriculum. Teachers are underpaid and hence of poor quality, and due to legal action discipline is not properly enforced. Thus US lags the rest of the world in student quality and this must be redressed.

6. End US hegemony: Many of policies of US including the Iraq war are not adding any more friends to the US and now it has been totally isolated. So, it should focus on strengthening international institutions like UN & EU to share its burden and consult with the rest of the world in greater actions. As US is slowly losing its economic superiority comparable changes in defense policy must be made, and defense allocations pruned.

However, I disagree with the some of the observations of the author including his undue fear of wage equalization. Eventually, there will be a wage equalization where US and the rest of the world will come closer. This is because US gotten to where it was, because the great countries of the world were sleeping then. India & China contributed to 75% of world GDP till 17th century and then due to external intervention were totally broke & poor. In the meantime wars weakened Europe, and US got a golden chance to rebuild the world and in the process built a legendary economy. There were more kids and very little old men and so everybody got great safety nets and high school students landed in great jobs. US consumed half of world's major resources with one-twentieth of the population. So, what it reached in early 1980's & 90's were peaks that, in my opinion, can never be reached ever. As other nations start waking up there will be a need for equitable distribution of resources and balancing act will continue. Eventually, US will become like rest of the world consuming what it deserves and that is the best that could be hoped for a nation with scarce history & no ancient culture though they can partially equalized by great entrepreneurial spirit of the 19th & 20th centuries.

But, the challenges that involve the spreading of resources among the old and new owners will be anything but painless and great powers must ensure a smooth transition to ensure the continuity of the world.

Inflation! Why should India care?

There are two people - one a 70 year old man seen the best of his life and in a hospital bed and another is a 18 year old healthy boy playing an aggressive soccer game. Now, a rise/drop of blood pressure for the former by even a few percentage requires immediate attention and intervention by the doctors. But, what about the latter? Should same yardsticks be applied? Should the doctors barge in the middle of the game, and medically intervene if the heart rate marginally increased above 70?

This is the game that is currently going on in India. The pundits at Reserve Bank of India (RBI), worry day-in day-out anxiously watching the inflation jumping around 6%. They have reasons to worry. They follow a lot of practices of the US Federal Reserve, Bank of Japan & European ECB that have set their main mandates as controlling inflation, and growth is a footnote for them. But, at some point those worriers at RBI should ask themselves - are the comparisons valid? Inflation control makes sense for Europe, Japan & US that have had their best times, whose people lead a comfortable life currently, whose growth rates are barely a few notches above ZERO, and small changes in this stable economic equilibrium can wreck people's life-long savings and bring financial disasters. In many sense, they are like the 70 year old man - survivability and maintaining status quo is the key.

But, what about India that has just started to grow. Majority of its people are poor, not many have too much of life-long bank savings to worry about losing a percentage due to inflation, and a lot of development is just waiting to happen. Simply, status quo and economic equilibrium is not an option. If it a'int grows, it dies. As simple as that. In this condition, with growth rates clocking in excess of 9% and bank interest rates above 8%, why does a 6% inflation bother anybody? And a lot of this 6% is due to global factors including global rise in prices of wheat, corn & dairy, along with sky-rocketing oil prices, commodities including metals and increase in transportation costs.

Secondly, this higher inflation coming after two years of unusually low inflation rates. Before that period, even double digit inflation was not unusual. Thus, another part of the game is a lower base to start out with.

Third, apart from global forces, a lot of inflation is due supply side forces - less availability of developed urban areas, rusty food production and full capacity utilization in industries. A healthy inflation rate can and will encourage more entrepreneurs to add capacity and build more production. Farmers will be eager to increase food production and property developers can wipe out scarcity in good urban development. An artificial intervention, puts water in all these positive developments and precludes natural development that should have happened.

Fourth, increase in interest rates have put enormous strain on government finances and non-plan expenditures have skyrocketed leaving little for capital & infrastructure expenditures and this will cause further damage to this fragile nation badly in need of development.

So, its too early for RBI to nose in and spoil the exciting game. Simply, its interventions are unwarranted and unnecessary - the 18 year old boy can take a bit more increase in heart rate and can enjoy the game. RBI is dealing with a healthily growing country, not some ageing nation.

Last but not the least, RBI is a tiny factor in the world game with gazillions of liquid money. When US Fed, ECB & BoJ are finding it extremely hard to rein in this flood, its preposturous for RBI to think of putting brakes on it. If you are pressing too hard on a wet soap, you know the consequences. So, RBI should know its limitations, and carefully guide the game externally instead of its fiats to banks.

Rollback the interst rates close to international levels and work with the government on producing proper development and consider sector-wise tightening of capital through well-guided regulations.

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Bank of Japan (BoJ) rises rates: What are the impacts?

While, writing this I find BoJ has increased the rates to 0.5% and this surprize jolt has hurt a lot of speculators.

The speculators and short term traders will get hurt by any upward moment of the currency (strangely the currecy moved downward yesterday, as the rate increase was below expectation of few organizations) and/or increse in rates.

However, long term is a different story. I dont believe Japan/Germany can ever attain the state they were once in the early 80's. The world economy then looked totally different with tiny nations like Japan, UK, Germany, Italy along with their big boss US controlled the world economy. Now, those days of tiny tots are gone, and big wigs - BRICs are entering the show and if terrorism could be controlled even Middle east will join the show.

What this means is that not only there is enormous potential for greater depths for world markets, but also that these nations are no longer in US control to take things like Plaza Accord or Bretton-Woods agreements.

These nations by their size and population have enormous appetite for capital and can easily suck in trillions of dollars in the next decade for their development to come in par with the west. Atleast India, with its huge infrastructural requirement could suck few hundred billions in the next couple of years.

So, Japanese currency's appreciation potential will get diminished as they face import pressures due to rising oil prices and export pressures, where even countries like India would join as competitors for electronics, Auto and Steel. And with current deflation there is very little room for upward movement of currecy and the ageing society doesnt want to spend as much as their younger counterparts.

So, my guess is that these new countries could suck the entire investment fountains dry and would coast on the wealth that Japan and Germany built up for decades.

It is great time for countries like India that has great entrepreneurship scope but limited access to capital (till very recently) and can use this great "Akshaya Pathra" for supercharging growth.

Should government subsidize Oil?

This question has been puzzling me and the answer to the question "Should Indian govt. control the petrol/diesel prices" produces an answer even baffling to me. I'm a free market supporter and in general against government intervention, but I feel Indian govt is not too wrong in controling the oil prices at the moment. At the same time, I also feel we in the US are enjoying a much cheaper petrol and the government here must raise the prices by increased taxes. I'll explain my contradictory position in this article.

Background:
In India, oil prices are not directly determined by the world prices, but controlled by the government in a process called APM (Administered Price Mechanism). What this means is that periodically, based on the international prices, government would set a prices for Petrol (Gasoline), Diesel (used by trucks), Kerosene (used by poor for cooking & lighting) and LPG (used for cooking by middle class) and all the oil market companies have to fix to that price. The price is set in a way that oil companies make profits on Gasoline, break even on Diesel and losses on Kerosene & LPG, and in return get compensated by government bonds.

In an effort to curtail inflation (and score political points ahead of forthcoming elections), the government has reduced the oil prices though the oil companies are still making losses out of subsidies on Kerosen & Diesel. A lot of columnists have blasted the government, and for once I'm not going to attack the government.

In India, currently after the reduction the price for petrol (gasoline) is around Rs.50/liter ($4.18/gallon) compared to US prices of around $2.3/gallon, while Diesel costs around Rs.32/liter ($2.55/gallon) almost the same price as in the US. And India has better refineries and slightly hence lesser cost of fuel production and distribution. Thus, its not correct to say that Indian government subsidizes oil. In effect, what Indian govt does is to tax the fuel heavily and then make profits at all levels mostly going to state & provincial governments.

So, gasoline in India is not cheaper than most countries and this makes sense as India should curtail the use of more cars till the necessary infrastructure comes up, and even then it is better not to go the American way of automobilzation. High gasoline price makes sense, but very high prices can affect sectors like tourism etc. and so I believe that current prices for petrol are neither too high nor too low. And the pricing of Diesel at lower rate makes sense, because Diesel is much more efficient (40% more power compared to Petrol) and it emits just 69% as much greenhouse gases as petrol for every kilometer of ride. Thus, by encouraging the Diesel usage government is pushing more people out of the more inefficient and nasty petrol towards a shade better Diesel. Moreover, Diesel is used by trucks transporting essential items and public transportation (Trains & Buses), apart from small captive power plants. Thus, Diesel subsidization encourages a more healthier practice of relying on public transportation rather than Automobilzation a trap that America got into. Now, US is considering more sops for Diesel based cars. And, since diesel is used in core sectors, a lower price will curtail inflation in a lot of sectors.

Now, coming to the sacred cow of Kerosene & LPG the main cooking and lighting source for the poor and middle class respectively. India has a ultra low price for Kerosene almost half the cost of production and this alone leads to a loss of over $2b/year and a similiar amount in LPG. I believe that LPG prices have to be gradually increased so that it breaks even, while some efforts must be made to modify Kerosene distribution. $2b is not a big deal for trillion dollar economy and the Indian government can effectively carry on protecting the poor for a longer time from the vissicitudes of global economy. The poor spend considerable portion of their earnings on energy, food & transportation and all these are directly affected by the fuel costs, and the resulting unrest can put the economy down by tens of billions of dollars, and hence Kerosene subsidies make sense. But, distribution mechanisms must be modified so that it reaches the appropriate persons and to protect the blackmarket sale and adulteration into petrol and other fuels. This paper has proposed good methods for this problem.

http://www.iimahd.ernet.in/publications/data/2006-07-06smorris.pdf

Global oil prices are erratic and you cannot have mechanisms that directly reflect the global prices in a developing economy. Oil prices swing from $10 to $80 in 5 years before coming to $50 in a few months, and this could totally collapse a fledgling economy like India, if the government doesn't interefere and smoothen things out. If you calculate all the taxes that various governing bodies in India make out of oil, it could easily compensate for the various subsidies - notably in Kerosene & LPG. And, even if you have to spend a couple of billion dollars more, its worth it to keep running an economy that adds $100billion to GDP every year. And to compensate the oil majors for the loss, the government has to provide sops, though in the long run I would prefer a more simple system, where the government reduces taxes on these oil products and also take away some of the sops from the companies. The non-m0netary sops including governmental intervention and support for acquiring global oil assets and exploration of alternative fuels and efficient systems should be pursued more.

In the end, I believe that India's currently policy of keeping a higher price for gasoline and a moderate price for diesel makes sense and should be continued. While the oil companies face losses due to this, they could easily be compensated with the government bonds, which inturn can be paid from the taxes the government earns on these fuels. And LPG prices in the long run should get in par with the global market, while Kerosene subsidies should continue but mechanisms must be reformed to ensure appropriate distribution.

Regarding the situation in US, I recommend higher prices and here is a slightly older post, but still relevant to the current issue.