Future of Rupee - Part I

Now that the inflation in India is tamed, the central bank in India (RBI) started back to its good old ways - buying humongous loads of dollars and increasing money supply bringing down call rates and also simultaneously increase Cash Reserve Ratio, affecting the profit margins of banks.

In the last couple of months, after I wrote the article series - "Is RBI handling inflation correctly", I had been in touch with a few financial columnists in India, working for Bloomberg, Hindu Business line and Business Standard and a few of them were very apprehensive of the rupee's effect on exports and cite their good old model - China on how to manage the inflows. However, good China had been in energizing the economy, I dont think that it is an good example for everthing. It has its price.

To put it short, if you have to manage heavy inflows - you have to screw one or more among the four crucial variables
a) Inflation
b) Export competitiveness
c) Financial health of banks
d) Interest rates and capital availability

So, if you have allow all those dollars to flow into India, unhindered, you will immediately cause rupee to appreciate (by simple demand-supply) and India's export competitiveness will be eroded as exports will be costs compared to imports. So, if the central bank buys up the dollars and prints rupee to prevent appreciation, it will cause inflation by making more money available in the system and weakening the currency. Now, to keep money supply constant and prevent inflation, the central bank has to increase interest rates and cash reserve rates (the amount banks have to keep idle and not use for loans from their deposits) affecting the availability of domestic capital and affective investment in crucial sectors. Now the Chinese model - sanitise all those dollars and not cause inflation by arm twisting the market by fixing constant prices and wages. And use banking sector to fun unproductive enterprises and load them with debt. This way the banks will take all those blow associated with maintaining the dollar low.

Each of these paths have a price. Inflation is the worst and no elaboration is needed here. If managed wrong and allowed to go on a vicious cycle, can cause the worst nightmares as seen in the hyper-inflation in Greece, Germany in the early 20th century and in Latin America in 1980's and 90's. Interest rates are among the next worst as it affects needy companies from raising adequate capital and affects crucial investment opportunities. Corporations would be unable to raise debt at favourble prices and affect economic expansion. And financial institutions are very crucial for a good market economy and making them a scape goat for increasing exports will debiliate the economy in the long run. Its like smashing the leg to give more blood to the hair. The last comes exports - whose importance varies from economy to economy.

For economies like Japan, Korea, Singapore and even Germany, the domestic population is so small and spend allergic that there is no way that they can ensure good jobs by relying on producing for local markets. They are forced to export and to export they have to have good currency support and so artificially affect exchange rate even at significant costs to economy. But, this doesn't hold good for China or India. They have 1 billion+ customers each and a good economic history that they dont theoratically need any external markets for their goods. If they can stand on their own legs by developing good local markets, the enterprises have so much of room to grow that they can forget about currency manipulation. And given their rate of expected growth and scale of operation, they cannot afford to depress currencies forever. Elephants cannot afford to jump trees and hide in burroughs and the managers of these trillion+ dollar economies better know this.

(Next part: The reasons why should the RBI allow freer flows and there is a solution, where we could avoid screwing up any of these 4 variables, to a great extent)

Back to Blogging after a long hiatus

I'm back to blogging atlast, after a 3 month sojourn. There were two many things that were happening that I hardly got time to sit down and write something. I got to write a couple of drafts, but later discarded them. I wish I could write a few elaborate articles, but the time required to put long good article in place (including the background reading) was demanding and I couldn't do enough allocation.

Last 3 months in Brief:
>> My parents and grandfather came to visit me and it was great time May - July. They were with me for my graduation ceremony, my dad's birthday, my birthday, my parent's wedding day and its great to be with the family. It was the longest vacation ever for my father and its the longest time, I spent with them since my school days.

>> I had the longest and best drives in the month of May. I drove for 2300 miles during my trip to Calgary, Canada visiting Banff and Jasper parks on the way. The one week trip through some of the world's most beautiful glaciers that are source for the biggest chunk of world's freshwater (most of water flowing through Missouri, Missippi, Niagara and other great rivers & lakes of North America draw its source near here). On the second leg, I flew to New York and had another 2500 miles drive around Toronto, Niagara, Pittsburgh, NYC, Baltimore, Washington DC...showing some of the iconic American tourism destinations to my folks. The 5000 mile+ drives on solo in 3 weeks had taken most of my energy for that period. I'll write on these trips, after a while.

>> My Ski accident in March had screwed the ligaments on both of my knees and on May 1, I realized that I had to get surgeries on both legs to repair back. I had one of the surgeries on June 11 that fixed 2 of my ligaments and I might have one more later this month to get everything completely fixed. But, the recovery for the ligament repair is long and so it will be a year, before I could take much of strenous physical activity (like Skiing or Skating :)). This was my first major surgery and the experience with General Anesthesia was overall very disturbing. I couldn't remember anything of that 2 hours and to think back of that overall blank state, I could think of death as the only closest thing. And the first week after the surgery was horrible. It was paining, itching and totally disturbing :( to have a knee locked out. And walking with braces and crutches was pretty discomforting to say the least.

>>I got a traffic ticket in May that put my overall driving under great stress. I just spiked to 90+ on a 70mph zone, as I was overall very tired after a week of driving and there stood a cop. Normally, I learnt to watch for a cop so that I could drop from 120mph to 70+ in no time, but this time tiredness and darkness took over. I was given a speeding ticket, but since I was perfectly alert and stopped immediately after the lights were put on, I was given no other citation (normally 23+ the limit can cause multiple tickets). After the ticket, I got so careful that I dont drive above the speed limits and life is a hell now. I couldn;t chase any powerful cars and I had to constantly move to right lanes to gave more faster cars a room in left lanes. Even stupid, sluggish and humongous trucks, tail-gate me. The moral: If you are a Lion you have the luxury to sit over your prey, but if you are as innocent as the lamb you are a sitting duck for others to prey on you.

Luckily, my ticket is dismissed by having an expert lawyer on my side, but its doubtful I would ever go to the 120-130mph range, that i occassionaly try on deserted highways with my V-8 machine. And with high gas prices and low fuel efficiency at high speeds due to wind resistance, I'm now happy at 70-75 mph range.

Overall, life has never been so tough and 3 of the passions that I had so far - Movies, Skiing and Driving all took a backseat. I also stopped communicating with people - no phone calls, emails, orkut scraps, blogging... Now, I'm very close to come back with my normal life. Let's see how the next few months unfold.

In the meantime, I'm getting back to touch with the economics literature and I'll be back to serious blogging there.

Is RBI handling inflation correctly? Part 3

In Part 1, we saw why RBI had to resort to hard measures like interest rate hikes and free exchange rate controls. 6% inflation is just a small indicator of the overall overheating that could be witnessed in the asset prices that show more than a triple digit appreciation, leading to a monetary policy change. In Part 2, we saw about the main tools for a Central bank - interest rates and exchange rates and how they could be used. No how all these changes impacts on us? The "us" involves exporters, importers, India economy, Indian consumers, Indian banks, Indian enterprises and Indian/overseas investors. In this part we will mainly see the impact on major export industries and in the next part we will see the impact on others.

In general, an interest rate hike dampens growth rate by squeezing liquidity (more money is absorbed by bank deposits, bonds and other fixed instruments) and make credit unaffordable (businesses have to pay more money on the loan). An exchange rate hike rate will discomfort exporters and help importers leading to a more bigger trade imbalance, and might again dampen economic growth. But, when we have to choose the lesser of two evils, the choices are not so clear. A point to be taken is between 1970s to 1990s when Rupee tumbled so much, did our exporters become very strong?

Exporters: In general exports go down as Rupee rises against the dollar. Why? For example, you make a car for Rs.2 million in India, at an exchange rate of Rs.50 to a dollar you can export and sell it to US or other countries at $5,000 (Rs.2.5 million) and still make a Rs.500,000 in profit. But, what if the exchange rate changes to Rs.40 to a dollar? Now, you cannot sell it at $5000 and might have to increase the price to $6250 to make the same margin but face a tougher competition against other country exporters who might sell for $6000 or something, or sell it under $6000 to gain the markets but lose the profit margin. In both the cases, the exporters are to lose, if you assume that the car will be made at the same Rs.2 million independent of the exchange rates.

But, this is where nominal and real exchange rates come into place. To put it simply, if the exchange rate changes there will be some impact on the price of production of the car. The movement from Rs.50/$ to Rs.40/$ will reduce inflation and can reduce the wage rises and domestic production costs. More importantly, you could import the components like engines, tires and steel bodies far more cheaply and the production of the car might fall much below Rs. 2million if other things are equal. The converse is also true, a runaway inflation and high import costs can offset whatever gains exporters get from a depreciating rupee as seen in the previous 20 years. Thus, if the central bank manages appropriately, the rupee appreciation can help a lot of sectors to get stronger, though in the short term they will be squeezed. In effect it is sector specific - the dependency of a particular sector on imports and domestic wages.

India's main exports include - Petroleum, Gems and Jewellery, IT services & Software, Textiles and emerging sectors like Auto, Pharma and Electronics.

Petroleum and Chemicals: India is oil poor, but still Petroleum is one of its top exports. Weird is it not? Iran imports good amount of its gasoline from India. Its primarily because of the Administered Pricing Mechanism for oil, where oil distribution companies have to sell things at a loss while private refiners are under no such compulsion. Result: private refining companies like Reliance and Cairn sell or plan to sell most of production abroad earning their actual value, while public sector companies like IOC and BPCL stand like losers. Politics apart, this indirectly helps India to have a very good refining capacity and become a good power in petro chemicals. But, this industry is not going to be much affected by exchange rate hikes as most of the export component is imported thus, profit dents will be marginal at best.

Gems and Jewllery: India is a market leader in Diamond cutting and polishing and one of the top makers of Gold jewellery that is mostly consumed at home. Since, gold and diamond are mostly imported like petroleum, this sector is not much affected. Even more, the industry being labor centric is also sensitive to wages (of skilled artisans) that could be affected by inflation. Thus, if inflation is dampened by exchange rates, thereby reducing wage rises the net effect on this will be very close to ZERO. And the domestic consumption is very high for these gold and diamond sectors to cushion any significant drop in overseas markets.


IT Services and Software: This is my favorite industry :) and if this industry is impacted who cares. There is much more cushion and slack in this industry than any other India's export industry and whatever perceived competition of China, Vietnam etc, they are not gonna be too soon to take advantage of this currency appreciation. This industry has its own problems like runaway wage appreciation and talent shortage, and compared to them exchange rate is still a minor thing. $1 still equals Rs.41+ and in India even now Rs.10000/month ($250) can earn a reasonable middle class living for a family of 4. So, most people demand more wages just because the companies could afford to give it. Surely, the current condition of an IIT professor or the Prime Minister receiving lesser wages than some startup junkie moving one file from this computer to another is not a perpetually sustainable one. And the sector is fat enough from a lot of tax holidays. Time for milking this holy cow.

Since, this exchange rate uniformly applies to all Indian IT companies they can uniformly cap wage hikes and with a very good margin they can still thrive in the competition. Thus, this sector does not deserve much merit in including for exchange policy settings and surely if Indian IT companies die out in competition, exchange rate will be the last thing in the post-mortem list.

Textiles and Leather: By far this is the export sector that is gonna be receiving the biggest blow. Not much of the components are imported, though some part of the sector is labor centric thereby benefiting if a lower inflation comes out of stronger rupee. But, for now the 500 pound gorilla (Chinese exports) is held back till next year due to export caps and China itself is facing currency appreciation, wage rises, reduction of tax benefits for exporters etc. So, the competition will also be slightly scaled back (relatively). But, being labor centric and producing $25billion+ this industry merits serious attention from the Indian government and sector specific sops and tax holidays apart from investments in new design could be promoted by the government.

Emerging Industries: These include Auto, Electronics and Pharma where India is not a major power yet but have a good future. We export a good amount of design and we still dont have much competition as we operate in a niche. For example, Indian pharma companies have established themselves as leaders in Generic drugs, in Electronics we operate on chip design etc and Auto we are into designing reliable components. In my opinion, we still have more margins to be worried about immediate exchange rate crisis. If the government sets up a proper environment and enables progressive policies, this sector can go far beyond the current level and the government must step up huge investment in these sectors that in the future could become cash cow for us. Personally, I would like the government to shift tax holidays and sops to these industries from the IT services and software, as the latter has matured enough.

Tourism and Services: Finally tourism. Again, the asset prices affects hotel rates so much that it is far more cheaper to stay at Manhattan than a rundown Bangalore, even in dollar terms. So, the asset prices have to be cooled to make India a good player in tourism and exchange rate appreciation will reduce the cost of buying planes and fuel for airlines, making India travel cheaper and competitive. And we have far more potential to be achieved in sectors like Medical tourism and cultural tourism, apart from NRI tourism, so this sector has only one way to go (up).

Is RBI handling inflation correctly? Part 2

In part 1, we saw the overheating phenomenon in India and why RBI is pushed into action. In short, consumer inflation is just part of the story, most important danger lies in the asset price appreciation that pushed RBI to take hard steps. So, what is inflation? In this part we will see how the central bank controls the two main entities - interest rates and exchange rates that affect inflation. This part will be more about inflation theory about the two main tools of a central bank.

Inflation is the classic condition of more money chasing few goods, and it means that the value for the currency you hold is having less value than what it used to be. There are four main components - domestic production, exchange rates, interest rates and consumption rate. Here interest rates (atleast short term) are more of an independent variable controlled by the central banks, domestic production depends on this and entrepreneurial skills + healthy conditions, exchange rate is semi independent in some countries controlled by government while it has to be really proportional to domestic production and consumption rate is dependent on people's psychology and all other variables. Together the effects end up at the consumer when he sees the high price and calls that inflation. Actually, it is just an end product of a whole deal of complex dependent and independent variables. Let us briefly look at each of them.

Interest Rate:

Interest rate is fairly direct. I giveup today's thing to you in anticipation that you will give me something better tomorrow. So, I pay you $10 today and expect you give me $11 back after a year. Here I have $10 available readily, and the other guy has expectation of making atleast $1 in the year's time. The $10 ready availability is called liquidity and the $1+ that he could make with this is called productivity. Now, if the system is perfectly elastic, and I now have $20 still I can loan it to him fully and get $2 back and so on, indefinitely. But, real systems are seldom elastic. At somepoint, the other guy cannot take all my money and still make enough money to give me the interest. At the that point the interest rate starts climbing down. Thus, in global bond markets (that is essentially a market for trading loans) as liquidity increases interest decreases. Conversely, if there is a credit crunch where I dont have $10 even and none of the people have it then the interest rates increase. But, there is a limit here, at some point the producer cannot give enough interest to you without raising prices so much or go out of business.

In the first case, when there is excess liquidy, the money fetches lesser interest rates in the long term, and this makes somepeople to not giveup today's comforts or they go for other sources of making money. Henc, they buy up junk instead of loaning the money and this causes inflation and asset boom. In the second case, the increase in interest rates causes the end products to be costlier and drives up the interest. Thus, inflation can be a resultant of both over liquidity and under liquidity - Damned if you do. Damned if you dont! This is where the central banks enter the system. They first establish some mechanism in which the markets are dependent on them and keep this as an handle. For example, they always give banks the short-term loans (they can print money at will and destroy it when they get back) and mandate the banks to keep some of their long term loans with them and this is the great way in which hold control. And even more, since they are the most trustable business system (they print currencies) they can setup some rate for taking medium term loans from other people (these are called treasury notes or bonds or T-bills) and many people keep atleast some portion of assets in these instruments as they are the safest.

So, now they have a full handle on the system. On one end they can get money from people at pretty low interest rate and on the other end they can loan short term money to banks at any rate they choose, as they print money. So, if the liquidity goes beyond a certain limit, they start issueing more higher rate treasury notes and increase short term interest rates so that people will put more money into governments and take less money from them. Thus, contrary to what we expect, liquidity forces T-bill interest rates to go up, while the rest of the interest in other long-term instruments that offer at more interest rates might fall if they dont find enough takers. This is what currently happening in the US. Long term bond rates have fallen and short-term T-bills have increased for a while now. At some point, the yield curve will be inverted, short-term loans fetching more interest rates than long-term loans.

Now, what if there are enough takers for the loans. Then, both T-bills and long-term rates go up, and this is essentially not an over liquidity situation but actually a liquidity cruch (more demand than supply of money). This is what happening in India. Whether RBI had increased rates or not, the banks would have increased the rates, as there were more demand for loans than more supply of deposits. This is actually a healthy condition IF the loans were absorbed by the producers implying we are having rising productivity. But, most of the loans were absorbed by stupid consumers who bought houses and depreciating assets out of them, thereby not causing any increase in productivity. With the natural increase in rates these people will be priced out, but in a dramatic change of fate we will have higher inflation as the interest rates will cause producers to mark their prices up or else lose margins. The first will cause inflation, second will cause market crash. In some sectors (steel, oil and cement) Indian government deliberately muscled in to cause the second.

In short, interest rate is a function of liquidity and productivity, and we are actually having a liquidity crunch in many sectors causing interest rates to spike which will also puke up the sectors that have been gorging money, like housing and auto loans. While, this could increase prices in the long term, it will reduce demand in the short and medium terms and cause asset depreciation thereby cooling the system.

Exchange rates:

Exchange rate control how much one good should be exchanged for to get another good, in a open market. For example, in a closed system if a farmer produces 10 kgs of rice and a gatherer produce 5 kgs of firewood, they both can exchange stuff on some fixed mechanism, say 1kg rice = 0.5 kg of firewood, so that both benefit from other's stuff. Now, if the farmer could produce 20kgs of rice, can he get 10 kgs of firewood from the market in this closed system? The answer is no. So, now the exchange rate would be adjusted such a way that 1kg rice = 0.25 kg of firewood. Thus, the price of firewood is said to be inflated, whereas it is actually the production of rice that is inflated 10 to 20kg and as a result its dependent exchange mechanism got changed. This is ECON 101.When you produce something more than the exchangeable limit, its value keeps going down and this is the natural process by which economies readjust and make things that are more valuable and productive. In the closed system case, the farmer could focus more energy on gathering some firewood too instead of overproducing rice.

This is all in open market (in 2 person system it ought to be), but are they true in complex real world markets? Not necessarily. The farmer can keep producing his 20 kgs of rice and then give it to the gatherer at the same exchange rate and each time he will get 5 kgs of firewood and 5kgs of firewood in I Owe You notice, which means he writes a paper in which he says he has to give the farmer 5kgs of firewood later (and in this closed case, it is impossible unless he finds a way to dramatically improve the yielf of firewood). This is the farce that is currently going on in the pegged exchage rate system done by Japan, China, Europe and others including India. Instead of allowing the exchange rate of Yen/Renmimbi/Rupee to Dollar (rice to firewood) to flow by natural process they just keep getting the stupid IOUs that the gatherer (USA) has no intention of paying back. But, it doesnt matter: by the time the crisis occurs the old men in the central banks would have died leaving us all in the jeopardy.

Now, what we like many other central banks have been doing is to keep getting IOUs from US (called dollars and T-bills) and right now we have more than $200b worth of them. This whole money has not dont much good to the country and it has just made the exporters like IT sector filthy rich. The appreciation of rupee could have reduced the cost of imports and increase rupee's value threby reducing inflation. But, instead of allowing rupee to appreciate when we got billions of dollars from investments and exports, what RBI did was to print trillions of rupees of money and got the dollars from the exporters and FIIs. Thus, our money supply went up by many trillions (2 to 3) in the last few months just because of this. In effect, indirectly we were subsidizing FIIs and exporters by putting domestic people to strain. And this has currently been stopped for a while, thereby appreciating the currency.

In essense, RBI is currently doing the right thing of allowing the rupee to float freely and the markets determine the exchange mechanism instead of just gorging on the dollars, that might not have any use if US falls.

So, how this twin effect of interest rate hike and exchange rate appreciation going to impact us? That's in part 3.

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.