Posted by: qmaxim | August 29, 2019

Growth and jobs – what can be done?

PM Modi in the second term has set ambitious targets  for the country on GDP growth, job creation and increasing  income.  First target is increasing size of Indian economy to $ 5 trillion in 5 years, from  roughly $ 2 trillion at present.  Infrastructure investment of  Rs 100 lakh  crore in 5 years is  one of the  things  being considered to achieve this. As per calculation of some experts , GDP growth has to accelerate  to  8-8.5%  (from current 6.7-7.2%) to achieve this. This along with other large  handouts for weaker sections  is a very large sum of  money to be raised.
Where is the money going to come from?   It is going to be challenging task considering the  state many  financial institutions are in.

Financial sector  crisis

Some of  the banks  (particularly public sector banks ) and  finance institutions  are  going through a  crisis. Large loans given to  many  companies  have turned into non-performing assets (NPA).  This has come into open due to tighter scrutiny of financial sector by RBI and implementation of   Insolvency and bankruptcy code (IBC) introduced in 2016.  This  has resulted in forcing promoters of  companies out of their companies  or  in some instances  companies going into liquidation. Some of the reasons for  NPAs are:

  • Lousy due diligence : in many cases  banks have lent large amounts without doing even basic due diligence. There are instances in which  loans were repeatedly  given to companies even when their  registered address was bogus. Recently, a large housing society received eviction notice from a bank only to be hastily withdrawn.
    It emerged that builder had hypothecated the buildings after selling them!
  • Fraud : Many tactics were used –  promoters took massive loans then gave ‘loans’  to related parties or  shell companies and didn’t return the loans ( turned them into sick companies), got phony orders from foreign entities owned by them,  made purchases at highly inflated prices, made sham  purchases, diverted funds to unrelated businesses, evergreening of loans to show that companies are  healthy.  Lenders  and auditors failed to detect such frauds for years. Diamond  merchant  Nirav  Modi’s  companies are one such example and fraud is said   to be about  1.4 B dollars. Lead banker  was Punjab National bank.
    Weak legal system has allowed borrowers to escape jail and many of the scamsters have fled the country.
  • Changed economic circumstances or competitive landscape:  Due to changed circumstances, once profitable companies  have  started making massive losses.  Companies in telecom sector is one such example.  After entry of new player  Jio with  superior technology, better offerings and ample  funding,  incumbent players started making huge  losses due to catastrophic loss of market share. Some of them  merged with other players at deep discount, others  went bankrupt thus sinking large sums of money.

Fix  finances first  then raise money

Before ambitious targets are achieved financial sector should be  put in order, tax system should be straightened out, exiting funds should be utilized efficiently. These are some of the things which should happen.

  • Poor state of financial institutions: Punjab national bank which lost huge amount of money  in Nirav  Modi scam is a typical example. Audits by multiple agencies ( external auditor, internal auditor, IT auditor, SEBI, RBI, vigilance ) failed to detect the fraud for many years.  Govt has spent 1000s of crores in re-capitalizing  banks with no end in sight. Unless banks skill sets related to — risk assessment , customer orientation, lending profitably, audits improve,  
    –losses and  scams will recur.
    A complete overhaul of audit process is called for.
  • Same goes for corporate audits-  they are found wanting. Recast of audit mechanism is need of the hour including stringent punishment for scamsters.
  • High tax rate: Less than 2% of the population pays income and other taxes. People having  legally earned income end up paying large percent of their income as taxes.   For example, income tax  rate is 20% for a  person earning Rs 5 lakhs/year. Assuming GST rate of  18%  for a  purchase, he has to shell out about Rs 1400 for a item costing Rs 1000. This severely curtails their purchasing power thus reducing overall demand for goods. Taxation structure should be tweaked to increase demand for locally produced goods.
  • Reduce subsidy : Most of the population (98%) don’t pay taxes. Farm income is totally tax free.  In addition, irrespective of income,  farmers receive handouts and are entitled to highly subsidized inputs (e.g. electricity, water, fertilizer , pesticide) for farming.   Many  people convert  their ill-gotten wealth to  farm income to escape taxes.  Excessive amounts of  grains are produced for which demand is low or price is low.  Taxing farmers is a political hot potato. Not all the farmers are poor or need support. Clever ways can be found to tax them. Money spent on subsidies can be reduced, for example, by  reducing extent of subsidy depending on value of purchase.
  • Fix GST :  Even though GST has lead to greatly simplifying tax payment throughout the country many anomalies exist. For example, commonly used items like    biscuit   are taxed at 18%, cement at 28% and issues with input credit.    
  • Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. But RBI can start small lending say $20 B/year.
  • Improve data collection: As of now sectorwise data with sufficient granularity, detail and accuracy does not exist. A good system should be setup for periodic collection, analysis and reporting. This should in fact be the  top priority.Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. RBI can start small by lending say $20 B/year.Poor state of financial institutions: Punjab national bank which lost huge amount of money  in Nirav  Modi scam is a typical example. Audits by multiple agencies ( external auditor, internal auditor, IT auditor, SEBI, RBI, vigilance ) failed to detect the fraud for many years.  Govt has spent 1000s of crores in re-capitalizing  banks with no end in sight. Unless banks skill sets related to — risk assessment , customer orientation, lending profitably, audits improve,  
    –losses and  scams will recur.
    A complete overhaul of audit process is called for.
  • Same goes for corporate audits-  they are found wanting. Recast of audit mechanism is need of the hour including stringent punishment for scamsters.
  • High tax rate: Less than 2% of the population pays income and other taxes. People having  legally earned income end up paying large percent of their income as taxes.   For example, income tax  rate is 20% for a  person earning Rs 5 lakhs/year. Assuming GST rate of  18%  for a  purchase, he has to shell out about Rs 1400 for a item costing Rs 1000. This severely curtails their purchasing power thus reducing overall demand for goods. Taxation structure should be tweaked to increase demand for locally produced goods.
  • Reduce subsidy : Most of the population (98%) don’t pay taxes. Farm income is totally tax free.  In addition, irrespective of income,  farmers receive handouts and are entitled to highly subsidized inputs (e.g. electricity, water, fertilizer , pesticide) for farming.   Many  people convert  their ill-gotten wealth to  farm income to escape taxes.  Excessive amounts of  grains are produced for which demand is low or price is low.  Taxing farmers is a political hot potato. Not all the farmers are poor or need support. Clever ways can be found to tax them. Money spent on subsidies can be reduced, for example, by  reducing extent of subsidy depending on value of purchase.
  • Fix GST :  Even though GST has lead to greatly simplifying tax payment throughout the country many anomalies exist. For example, commonly used items like    biscuit   are taxed at 18%, cement at 28% and issues with input credit.    
  • Use foreign exchange reserves:  India has accumulated $ 438 B foreign exchange reserves, 8th highest in the world.  But this is not due to trade surplus unlike other countries which are export champions. This money is stashed away with foreign  banks or in US govt. bonds earning almost nothing.  Instead, money can be lent to  high quality borrowers to setup manufacturing facilities or  infrastructure. Some experts think that  $200 B in reserves is sufficient. But RBI can start small lending say $20 B/year.
  • Improve data collection: As of now sectorwise data with sufficient granularity, detail and accuracy does not exist. A good system should be setup for periodic collection, analysis and reporting. This should in fact be the  top priority.

Way forward for  growth and job creation

Following are some of the reasons for slowing growth rate and relatively low job creation.

  • Poor export performance:  Notwithstanding  IT and few other items, India has failed as a exporting nation. China with 5 times India’s GDP exports 8 times as much as  India. There is tremendous potential for  exporting commonly used items such as garments in which India has natural advantage being largest producer of Cotton. Even Bangladesh exports more. Persistently overvalued Rupee exchange rate is one of the  reasons. High supply chain  cost, taxation, inflexible labour laws are the other reasons. Many countries put invisible trade barriers.  A coherent export/ import policy is need of the hour. Limited number of items should be prioritised for creating large export markets.  Areas in which India has natural advantage should be the focus  to start with.
  • Too much imports : In many cases importing goods is cheaper than local production. For example, cooking oil imports for many years was over $ 1B. Even tomato purée in large quantities   was imported to manufacture ketchup. Last year imports of Agarbatti (incense stick) was Rs 800 crore. Recently I purchased a laptop bag – nothing fancy – was surprised  to find it was made in  a far eastern country. It is possible to import even common use goods duty free or at low duties due to agreements (such as with  Asian countries , WTO)  India has signed many years ago. Almost all countries have trade surplus with India- for example- China had yearly  trade surplus of  $ 50-70 B in the last few years.   Some of these agreements have to be renegotiated. India’s trading partners should be encouraged to buy more.
  • Imports are lucrative for government: Imports like gold, petrol are taxed heavily and they   play a large part in meeting short term tax collection targets. Hence, policy makers may  not be  keen on giving incentives for local manufacture.  Long term interests should be balanced with short term revenue targets.
  • Pubic sector: Due to the same reason, pubic sector companies are forced give large dividends and do  share backs.  Consequently, most of them have been laggards in investments over the years. With some exceptions, since opening up of economy in 1991,  most of the investments have come from private sector.

5  trillion dollar GDP  and 100 lakh crores investments  are good targets to have. But more importantly, funds should be deployed in a meaningful way.  Following should be basis: goods/service created should have sufficient demand, there should be  enough  people capable of buying these goods, should lead to  growth of  real income, support ‘make in India’ & job creation. Priority should be given to investments   which can earn adequate returns

Of course,  achieving  $5 trillion depends on Rupee to Dollar exchange rate weaker Rupee  is not necessarily bad thing.

Posted by: qmaxim | August 10, 2019

Is higher inflation bad? Not really

Newspapers and TV channels routinely report on inflation numbers whether they have gone up or down and to what extent. And what the government/ RBI (Reserve Bank of India) is doing about it if it has shot up?  If inflation index shows a spike, there is a panic in government circles. Inflation has remained steady over the last few years and is in fact falling. But, is low inflation good? Not necessarily.

During the 1st term of Narendra Modi led government, in consultation with then RBI governor Dr Rajan, a law was passed whereby main focus (rather only focus) of monetary policy and government was to maintain retail inflation in the 2-6% band. And to progressively reduce deficit to around 3.5%.
Entire focus of the monetary policy was so called ‘inflation targeting’. I.E. progressively reduce inflation year on year primarily by keeping interest rates high. No mention was made of increasing GDP growth rate or job creation.


What really happened
When PM Modi took over the reins of power in 2014 from Manmohan Singh led UPA government economy was in mess. Inflation was running in double digits, growth had started stalling, corruption scandals were order of the day and it was widely held view that it was a directionless administration. So, main focus of the new govt. was to bring order and reduce inflation to start with. Govt. managed to these pretty quickly. However, this  has  continued as main plank of the policy even after 5 years.


Why lowering inflation may not be good
Inflation index called CPI (consumer price index) is a composite number derived from of prices of basket of various items, & their respective weightage based on their relative importance. There are mainly two inflation numbers published at periodic intervals, headline and core inflation. Inflation targeting strategy supposedly targets headline inflation.
India being a large country — prices vary a great deal from place to place. Prices depend on many factors – distance from production centres, transportation costs, income levels at the location, applicable taxes, number of middlemen, etc. Income level varies great deal through out the country. For example, apples produced in north of the country sells for Rs 50/kg at Delhi wholesale market and consumer in Bangalore typically pays Rs 120/kg. Obviously, the difference is  due to transportation costs, numerous middlemen, losses due rotting, etc and has nothing to do with  interest rate set by RBI.
The inflation index gives great deal of importance to food items which may not be important anymore, for most people for two reasons. For city folks with higher income, food items form small part of their expenses. Low income families are provided highly subsidized food grains and some other items, hence does not matter for them either. In many cases price paid by poor is absurdly low – for example rice which sells for Rs 35/kg typically is supplied at Rs 1/kg.
However, low prices of food items hits farmers hard as their buying power greatly depends on it. As farmers and rural folks constitute more than 50% population this effects demand for most items such as — FMCG items, tractors , electronics, two wheelers. This effects growth of entire Indian economy. In spite of government fixing higher and higher reserve prices at which it buys food grains from farmers, prices have remained at low levels. In fact in most cases, food grain prices have remained stubbornly below reserve prices fixed by the government. While inflation has started falling and has remained low, worryingly for the government GDP growth has started falling in the recent quarters.


Does the RBI have control over retail inflation?
It does not appear to be so. RBI sets lending rates depending on inflation index, higher the expected inflation, higher is the lending rate to banks. This is called Repo rate which is 5.4% currently.
RBI’s own studies have indicated weak or no correlation between repo rate and inflation index. In fact during last fiscal, actual inflation numbers were consistently and significantly lower then RBI predictions. However, increasing lending rate makes borrowing costlier for wide range of goods and services such as housing and electronics.

For these reasons, a new framework is needed. Emphasis of new framework should be on growth and employment generation NOT on ‘inflation targeting’. How inflation index is calculated requires a re-visit as well.
See my coming blog on how to revive growth ….

PM Modi lead NDA govt completed 8 months in office recently. It has been a hyper active period with slew of  initiatives/announcements related  investment, manufacturing (‘make in India’), financial inclusion (‘Jandhan Yojana’), skill development (‘skill india’),  security, digital connectivity (‘digital India’) and  health and hygiene (‘Swatch Bharat’). PM Modi  also made  several successful foreign trips. India also had numerous high level visits from  foreign countries. Last high profile  visitors being – US President Obama &  US foreign secretary John Kelly.

It is now time for action. First step in making  these mega  initiatives bear fruit is to ask bold fundamental questions & challenge assumptions- then make plans based on these. Here are my five  big ideas on  way forward – these can  add 2% to the GDP. Most of these will support ‘make in India’ initiative.

 

  1. Economic policy:

Some questions-

RBI   reduced lending rates only recently but rate is still pretty high- is there an advantage in keeping them high?
Why  govt is so fixated on holding deficit percentage – there is also news that govt is reducing investment to meet deficit target.
Govt also set itself a further deficit reduction targets for coming years –is it desirable?

What should be done?

There is no evidence to prove  that keeping lending rates high brings down inflation –see my previous blog. On the contrary  it chokes growth in sectors which are dependent on borrowing from banks such as consumer goods, construction, housing , manufacturing, etc.

In the developed economies there is very little scope of improving infrastructure or basic needs of citizens as they are already taken care of- hence growth has to come from increasing consumption. In India, there is big scope for increasing  growth by improving poor state of infrastructure, meeting basic needs of large set of citizens, manufacturing. All these need large investments. Increasing investment into productive sectors will increase growth.
Anyway, deficit targets were fixed by previous govt. – was based on  fanciful  assumptions – it looks like these will not be met. If there is no acceleration in growth soon it is unlikely that challenging deficits targets will be met in the coming years too. As  long as productive assets are being created this will not lead to increased inflation.

It should be noted that China’s economic boom at least  in the initial years was primarily due to massive govt funded  investment  into infrastructure – & use of infrastructure is not free in China.

Govt should not be too fixated on reducing deficits at the cost of investment.  If investment is reduced to control deficit as proposed,  it will lead to downward growth spiral. Hence, there is a need to re-look at the proposed deficit   targets in the coming years & keep the deficit levels at the highest rate possible without stroking inflation.   Same goes for ‘fighting’ inflation by keeping interest rates high- lending rates should be kept as low as possible.

  1. Air travel:

Two fundamental questions-

Why the cost of air travel so high in India (travel to Singapore costs only 10,000 Rupees whereas B’lore to Calcutta costs 15000, B’lore to Gulf 30000), but still, except for one carrier, all  Indian carriers have been  making losses year after year? Air India’s accumulated losses are about 5.9 billion Dollars –with no profit in sight any time soon.

Why outgoing air travel is almost completely dominated by gulf and other foreign carriers?

Why repeated safety and other violations (e.g. it has worst on time performance of all carriers) particularly  by Air India is being tolerated by the   aviation regulator – DGCA  year after year?

Reason:

One reason touted for high fares and losses is- costly aviation fuel due to high level of taxes.  Due to this   local airlines are at disadvantage. Is it the only reason for the high cost ? Probably not.  If this were so, how is that one Indian airline is  able to make profits consistently?  This aspect should be studied.

Primarily due  terrible state of affairs in Air India foreign carriers are able to price their tickets at very high levels and rake in high profits. Due to AirIndia’s inability over the years to  ramp up operations quickly, foreign carriers have been able grab most of outbound market especially to Gulf destinations.  As 7 million Indians make gulf their home, this is a captive market waiting to be grabbed.

What can be done:

Reduce duties on aviation fuel as well other charges – this is happening already- support Indian carriers so that they become competitive –and treat all the Indian carriers equally. Remove all restrictions on private airlines so that they can grab as much of outgoing market as possible – this should enable them to double their size in next 5 years . Stop govt patronage to Air India – ask it compete for market share. Make  Air India public sector company to begin with, to reduce govt interference, ask it  to shape up otherwise sell it off. Reducing cost of air travel in India can give a big fillip to tourism industry.

Revamp  DGCA completely, bring in experienced  engineering talent – if required on deputation from foreign regulators such as US’s  FAA.

  1. Oil and gas

Why does India import 85% oil and more than 50% natural gas ?
India is 4th largest importer of oil – last year’s import bill was about  100 billion dollars. This is a big strategic and security issue.
Going by the current trends –no major discoveries in last 5 years-  this is only likely to go up. In the same period US has almost become self sufficient due to shale revolution- India does not even have a draft shale gas policy let alone any new discovery. Gas is imported at 3-4 times the cost of locally produced gas.

Reason:  Public sector ONGC has not made any new oil discovery in the last 10 years. Only major Gas discovery made by RIL is stuck in technical issues and litigation. Even when discovery is made DGH (the down stream regulator) and ministry takes ages to check this and give their approval. Many of the old public sector refineries can’t  handle different grades of crude thus reducing their flexibility.

What can be done:

Simplify  oil discovery policy radically and fix the price of oil/gas (based on ease of extraction- onshore, offshore, deep sea, and so on)  to balance between cost to consumer  and  at the same time making it   attractive for investment. It is necessary to make investment attractive as most of oil and gas is found in not easy to find unlike oil rich countries. Shut down   regulator DGH – it has only lead to endless discussions, litigation and delays.  Also, regulator’s impartiality is in question as  it is manned mostly by   public sector oil industry employees on deputation- they are unlikely to go against their parent organizations. Have a simple revenue sharing price formula in which share of the govt progressively  increases as the years go by -so  that contractor recovers his investment. Have a time bound approval mechanism. Come out with attractive shale gas policy pronto.
Build a large corpus when the price of oil is low -as it is now-so that there is enough buffer for investment and to subsidize when the price of oil begins to climb again. Modernize refineries so that they can handle all types of crude including low grade   crude – which many of them are unable to do at present.

Have 20-30 year  fixed price contract with foreign oil suppliers (particularly the ones with high production cost or their govts are vulnerable ) similar to what Russia signed recently with China. While western oil companies are moving out of Russia due to uncertain environment – China is quietly pouring billions of  dollars in developing oil resources. Negotiate with the US so that they allow their shale gas producers to export low cost gas –currently    export is allowed only to their  strategic partners.

Encourage India’s oil suppliers to invest more in India and import more to reduce massive deficits.  Use foreign exchange reserves to fill strategic reserves which are being constructed – buy oil when the prices are low – which is now .

  1. Electronic Hardware:

Why does India  import  almost 100% of electronic hardware ? Most of the imports are from  China. TV sets, mobile phones/ tablets, electronic switches, computers, medical equipment are imported – the list is endless. Only cell phone assembly plant in India shut down recently. This  plant  based in Chennai, owned by Nokia, employed 20,000 people.  Current imports are about 100 billion dollars which is likely to touch 300 Billion dollars in the next 5 years if the  govt’s ambitious  digital India & computerization programs takes 0ff & internet penetration in India reaches the expected level. Import bill is lot  more than India’s oil import bill.

What can be done:

Provide incentives & improve ease of doing business -and woo    investors particularly from Taiwan, Japan and South Korea. These countries are the largest investors in China and have created millions of jobs there. Just doing  electronic assembly can create millions of  jobs.For example, Foxconn a Taiwanese  contract manufacturer, employs 1.2 million people mostly in China. Foxconn is a contract manufacturer for Apple, Xbox,Amazon and many  others.But just incentives may not be sufficient inducement for this to happen quickly- for this to happen quickly  some amount coercion is required. One way would be- tax on imports – rate of tax progressively  decreasing with lower import content.   This is somewhat similar to strategy followed by China- insisted on technology transfer and partnership with Chinese companies in the initial years as a condition to access large Chinese market.

Make it mandatory for large electronic networks such as  Facebook, Flipkart, LinkedIn, Amazon, Google, Microsoft, Visa, WhatsApp, Twitter, Yahoo and Indian telcos to have  their server farms in India. Presently none of them have servers in India. After all, ultimate objective of these platforms is e-commerce. This is important due to economy and security  considerations. At the rate which  these networks are exploding investment of billions of dollars will be needed. For example, India constitutes 2nd largest number of  Facebook users, so is the case of   LinkedIn. Transaction done on Amazon platform in India is likely to  touch 2 billion dollars this year. Apart from employing thousands it will also  lead to skill development on a massive scale.

 

  1. Metal and Mining:
    Why no addition has been made to Gold reserves even though India has been consistently 1st or 2nd  largest importer of Gold all these years?
    Legal Gold imports were roughly 50 billion Dollars last year, probably the total is 70 billion dollars -may be even more.
    India has one of the largest reserves of Iron ore & fourth largest Steel producer – still is a very large importer of Iron ore?
    India one of the largest Coal producers and has one of the highest  coal reserves- still a large Coal importer?

       Reason:

Except for one  mine  in Karnataka which produces  small amount of Gold –there has not been  addition in the last 60 years – there is not even a Gold exploration policy.
Mining of  Iron ore was stopped in large parts of country due to orders of supreme court- have started to reopen.  Also, imported ore in many cases is  cheaper than locally produced ore.

Coal mining is largely the monopoly of  Coal India and they have not been able to ramp up production.  Also, calorific value of coal produced is inferior to imported coal in most cases.  Some times, landed cost of imported coal is cheaper than        locally produced coal.

What can be done:

Urgently, put gold exploration policy  and incentives in place to encourage gold mining. In the short term,  import gold directly from gold producers such as South Africa.  Bypassing intermediaries  can save lots of money , put smugglers out of business, &  lead to development of gold processing industry in India. There is no reason why govt of India should not certify purity of Gold.  For example, India imported gold worth Rs 1 lakh  crore      from Switzerland alone last year. India should also explore  buying up  gold mines. By using large gold jewelry manufacturing  talent in India, India can become a big exporter in the field.

Encourage development of Iron ore mines by speeding up environmental clearance and sorting out other issues. Treat private and public sector producers on par. Allow export of some portion  of ores produced. Countries like Australia have achieved  high living standard mostly by exporting natural resources- there is no reason why India should not be doing the same. There is no reason why India can’t become second largest Steel producer- most resources are already available- all which is needed is encouraging environment.

Same goes for Coal. There is no reason why coal India should  have monopoly for mining coal- coal is not a strategic material any more – open the field completely. Govt has taken encouraging moves in this regard. Allow export of coal later.

 

All these initiatives  will contribute   substantially to  GDP growth and act as fillip to ‘make in India’ initiative. Recently,some skeptics expressed doubt whether there is market for output for ‘make in India’ . There is no need to find new markets – market already exists in India right now.

This is by no means a comprehensive list – there are other large opportunities, for example, import of  bulk drugs and pharma ingredients.

Posted by: qmaxim | October 18, 2014

Growth or inflation? – dilemma for India

It has been 5 months since PM Modi lead NDA (National democratic alliance ) took over the the central government in New Delhi. Among the many issues new government had to tackle urgently was the record low growth rate ( 4.4% GDP growth – a 20 year low) and persistent double digit inflation.

One of the debates raging in the govt. circles and the media is – which of these two issues have to be tackled first. Until now opinion of RBI (Reserve bank of India) governor – Dr Raguram Rajan ( a distinguished ex- IMF chief economist) has prevailed.

He has been of the view that inflation has to be tackled first- and unless inflation is brought under control growth can’t be ramped up. In order to ‘fight’ inflation one of the tools employed by RBI is keeping the lending rates high. Governor Rajan has resisted pressure to reduce the rates so far. This rate has bearing on lending rates of banks – this makes loans taken for purchasing household goods, housing, businesses etc, costlier.

I am of the view that focus should be on increasing growth rather than ‘fighting’ inflation. Here is why.

Firstly, I think inflation number has large errors –an important management principle is – what can’t be measured properly can’t be controlled. Govt. periodically publishes several inflation numbers – retail inflation, headline inflation and several others.RBI monetary policy depends on these numbers.
There is a high level of variation from state to state, region to region, urban areas to rural areas and even between various suburbs of the cities. In fact, as reported in the press, the prices of some of the commonly used items in the consumption centers is 2-3 times of what it is in the producing areas. Some of the reasons for this large variation is – inefficient markets, lack of cold storage, inefficient supply chain, large number of agents/ speculators, many small pop and mom (kirana ) shops, unequal taxation in various states, etc. This is not going to change any time soon. The inflation number RBI relies on to make decisions is a composite number- with weightage given for various items. Thus situation is unlike that of developed counties -with their well developed supply chains, efficient markets and availability of reliable data going back decades. Even in the US many states publish their inflation and other numbers – & Federal Reserve takes this information into account while making policy. With greatly improved telecommunication/ IT systems at present it should be possible to develop a better data gathering & reporting mechanism in India.

Secondly, question to ask is – is it desirable to control inflation? No doubt, low inflation is good for consumers. But, in India large proportion of the people particularly in the rural areas are dependent on agriculture – higher prices of their produce is obviously better for them. Over the years, prices of many food items have been gyrating wildly – for example- price of onions have been between Rs 8 to 80 in the last one year. In the good years people in the rural area feel suddenly wealthy and there is boom in sale of goods and services. And in bad years – when prices are at the bottom- many commit suicide. Thus the govt. has to balance the price expectation of the two communities. Thus, too low a inflation is not good for everyone.

Thirdly, question to ask is – is it possible to tackle inflation by changing bank rates alone- I don’t think so. As I said before, calculation of inflation numbers needs revisiting. India differs significantly from developed economies in most ways. India is largely cash based economy. Most of the population even now does not have bank account- PM Modi has recently launched a scheme to change this situation. Minuscule part of the population owns stocks or bonds. Very small part of the population pays income tax- and agriculture income is totally tax free. Also, in many cases, prices are distorted as govt. decides reserve procurement price of many food items and supplies to certain consumers at dirt cheap prices. For example, rice is purchased at Rs 22 / kg, supplied to ration shops at Rs 1 /kg and open market price is Rs 50. Nobody is going to lower price below this base level whatever the bank lending rate may be. Many years of the growth can come from modernizing India’s moribund infrastructure – this is unlike developed economies where growth comes mainly from consumption. All these make well known laws of economics (applicable to developed countries ) of doubtful validity to India.

Fourth and final – one has to question the hypothesis that low inflation has to happen before growth. During the previous NDA govt., (1999-2004) growth was about 8% but inflation was under tight control, but RBI lending rates were at record low. Last week,wholesale inflation suddenly touched 5 year low – with no change in RBI rates. This was mainly due to falling oil prices, seasonal price fluctuations, expectation of bumper crops, administrative price control measures taken by the govt., & responsive governance. These along some other measures such as much delayed enactment of Goods and Services Tax (GST) legislation will go long way in managing inflation and accelerating growth.Another aspect to tackle is opening up and computerization of agricultural markets (Mandis) – which will lead to deepening of the markets and would make them more efficient.

While all these are happening – there are very few signs of uptick in growth. In fact, The latest figures for industrial production showed output stagnating in August, rising just 0.4 per cent year-on-year, with manufacturing and capital goods both falling over the year. Any measure to prop up growth will be helpful. One such measure is lowering RBI lending rates. This makes borrowing cheaper thus giving a fillip to purchases and economic activity – such as for housing, consumer goods, electronics, manufacturing .

Thus focus should be on growth rather than taming inflation. Govt. has taken many steps in this regard – but lot needs to be done. There is also an urgent need to build rigorous model for Indian economy – this should be possible due to availability of much better communication/ IT infrastructure and skills in the country at present.

 

On 26 of May, Mr Narendra Modi will take the oath of office as the 15th prime minister of India. He has won unprecedented emphatic mandate to govern India for the next 5 years.Bharatiya Janata party (BJP) of which he is the prime minister elect, has won clear majority on its own in the LokSabha (the lower house of the parliament),
a first for any party in  the last 30 years.

Many newspapers writers, foreign economists, TV commentators & investment gurus have now gone overboard in giving advice as what he should (or should not) be doing.
Until recently, some of them have been his bitterest critics & their constant carping for months seemed to have no effect on how people voted.

Here is my unsolicited advice – top 13 things he should do. By no means, this is an exhaustive list.

  1. Many government departments exist simply because of historical reasons. For example, when government had monopoly (during infamous license permit raj) over the economy, Steel ministry was all important for developing Steel industry in India. Steel is no longer government monopoly but still this department exists. First thing to do is to ask each department to justify the reason for its existence.
  2. Many government departments share their role with independent regulators in many sectors of the economy but continue to function as before. It is imperative that their mission and vision is clearly defined. For example, civil aviation ministry and DGCA the aviation regulator operate in roughly the same space. It is important to have top class regulators, some of them are not up to the mark. For example, aviation regulator DGCA needs overhaul.
  3. Most departments work in silos, it is common to hear ’our department is of the view’. In many cases papers shuttle between departments for months before any decision is taken. They should be forced to work in teams, take collective responsibility, work in time bound manner and thus speed up decision making.
  4. When the results of election started pouring in & it was clear that BJP is set to win, it was reported that large number of babus sought transfer and previous regime granted their wishes. Probably, many want to avoid time bound work environment which the new government is likely to implement. Role of each person should be clearly defined (i.e. who does what) which does not seem to be the case now.
  5. Most departments don’t seem to have neither clearly defined list of services nor the time frame in which they have to be delivered. Even routine tasks such as appointing persons to positions are delayed sometimes for months. Sakaala (on time in Kannada) scheme of Karnataka government is a good starting point.
  6. There seems to be no systems thinking. If something goes wrong enquiry commission is setup and nothing is heard of this till one more similar event occurs & then one more commission is setup and so on. A glaring example is terrible flying record of Indian Air force; force has lost quarter of aircraft in the last 5 years no action has been taken to fix the problem apart from enquiries ordered after each incident.
  7. Each time government sets out to do new things or a new entity is setup – same set of people are involved namely – politicians, judges, ex- govt officials or Indian administrative services officials. This leads to group think and imperfect solutions with people more interested in protecting each other’s interests. Fresh thinking can be brought about by bringing in diverse set of people from industry, economists, management experts and others. Same goes for the cabinet.
  8. Most government departments don’t have competency in managing large
    projects. One example is now stalled ambitious highway building project. Way to go is public / private partnership with involvement of local people.
  9. It myth that investment has to come from foreign direct investment for the economy to grow. There is no dearth of funds with the local investors they are simply not investing due to bottlenecks in the economy. Nobody is going to invest more money if current investments are stuck. In the recent past, most of the foreign funds have gone to stock market, bonds market or taking control of successful Indian companies rather than sectors which are desperate for funding like for example infrastructure.
  10. There is huge untapped potential and big growth opportunities sectors such as tourism, infrastructure, mining, transportation, manufacturing (high tech or low tech), public services, defense manufacturing, retail & electronics hardware. Most of these don’t require expensive new technology, lots of money & or external expertise – government has to provide enabling environment. These have huge employment potential as well.
  11. Many of the public sector undertakings are well run, are billion dollar enterprises & have big potential. Apart from diluting the share holding to reduce budget deficit, very little has been done to make them better. There is a confusion between the role of ministry controlling them and their respective management boards. Many of the executive positions remain unfilled for months & political interference is rampant in appointments. Government should follow hands-off policy with their boards made accountable for their performance.
  12. It is easier in the long run to constitute something completely new rather than making radical change in the existing structure. When authorities were trying to force Bombay stock exchange (which is  one of the oldest stock exchanges in the world ) to computerize, entrenched vested interests fought it tooth and nail for years. Ultimately, entirely new, fully computerized stock exchange ( NSE) was setup which overtook the old exchange & continues to dominate the market to this day.
  13. It is important to fight corruption, but to start with, focus should be on preventing it from happening now onward rather than digging up dirt of the previous regime. Clearly defined rules, transparent working, no leeway to make arbitrary decisions, time bound delivery, computerization, prosecuting the big fish goes a long way in achieving this. Example should be made of few corrupt big fish rather than going after minions .
Posted by: qmaxim | May 19, 2014

Mao-The Unknown Story – my take on the book

Recently I read a book ‘Mao- The unknown story’  by Jung Chang and Jon Halliday first published in 2005.

 
Even though Mao died way back in 1976, the book is relevant even today as the Communist party of China is in power  in China even now. CPC  even now declares that it is Mao’s heir.
This well researched book  could only  be  published 30 years after his death  probably due to secrecy involved. This biography  of almost 1000 pages,  meticulously tracks the life of chairman Mao  Tse–tung from his birth in a peasant family in Hunan province  to his death as the  undisputed leader of China  at the ripe old age of 82. The biography is written in the form of a  story which is interwoven with the story of birth of communist China and subsequent rule by  Mao & reds for decades.

When    Mao began is long journey to grab power and unite it under communist rule,  parts of  China were  occupied by foreign powers – Japan, Soviet union and Britain. Many parts were semi independent and  there was a weak  central government lead  by General Chiang Kai-Shek. The foreign occupiers were brutal and hated by the people.

The authors track the birth of communist party of China,  growth of reds and the important role played in its success by Soviet union lead by  dictator Stalin. Stalin funded the CPC in the  initial years. The story tracks brutal military campaigns  of People’s liberation Army (PLA) and the so called long march in which  millions lost their lives. It becomes clear that Mao was completely unconcerned about loss of lives, personal freedom, human rights and destruction of  property. Many ancient monuments and religious sites were destroyed. He used terror   at first to unite China under communist totalitarian state then to solidify his grip on power. In the process several communist rivals/ opponents also were purged, banished or  killed. On becoming the supreme ruler Mao became obsessed in making China a military superpower. Former Soviet Union played an important role in arming China, training of experts and providing cutting edge technology (e.g. providing technology for atomic bomb & fighter planes)  for this purpose. This aspect is not so well known. Payment for this assistance was made mainly by supplying  food  grains. Grains were  forcibly taken from peasants resulting thousands starving to death. Second round of purges and deaths occurred during the so called cultural revolution unleashed by gang of four lead by Mme Mao. In all, over 70 million perished under Mao’s rule. Mao had extravagant life style similar to that of former emperors of China. He had  specially constructed houses in many parts of China with attendant concubines at his beck and call.

Towards the end of his life Mao appointed a relatively unknown official Huo Guo-Feng as his chosen successor bypassing many seniors in the politburo. At the time of his death economy was in shambles. However, soon after his death Deng Xio-Ping took over the reins as the  paramount leader. Diminutive Deng reversed most of  Mao’s policies and  disbanded state control of the economy in most sectors. This lead to economy  growing at double digits for decades, now becoming the second  largest economy in the world. However, other aspects   like supremacy of CPC remained.

Though many of Mao’s thoughts are no longer of relevance in modern day China, still, many of the reasons why China behaves the way it does can be traced to the history of China and that of Communist party.

Posted by: qmaxim | January 31, 2014

Facebook shutting down?

Recently, researchers at Princeton, one of the premier US institutions of higher learning   after a thorough study concluded that if the present trends continues, Facebook will cease to exist by 2017. This is  contrary to recent trends. Facebook is steadily growing users,  reported record recent quarter and replaced yahoo as the 2nd largest internet advertisement revenue earner.

Are the days when people (particularly youngsters)  constantly updating their Facebook pages & checking their Facebook news feed at all hours of day and night  & at all places finally  over? Is Mark Zukerberg the CEO of Facebook, having sleepless nights about his billions disappearing? He is worth US$ 32.9  billion at the moment.

Well, it looks unlikely at least at present, even though  its popularity among very young seems to  be declining slightly. In a hilarious rebuttal,  by using similar approach  Facebook researchers have  predicted  that Princeton university will   shut down by 2021. And air we breathe will run out by 2060 and mankind as we know of course will be no more.

What is happening here?

The amount of data generated has been increasing exponentially  in the last few years. Along with the data deluge, software for analysis (many of them free, such as R) are becoming readily available and used by many. Most  of the enormous amount of data so  generated daily is in    public domain.  Data from Twitter feeds, NASA, US govt, US weather service, Google search data, etc is freely available . Along with the data explosion  there is boom in the number data crunchers called data scientists who work on interpreting this data to gain insights, unearth relationships and importantly to make predictions.

By using these powerful  easily available data analysis tools it is possible to unearth relationship between many variables (sometimes in 1000s)  and the variable of interest. One commonly used measure of strength of the relationship (or  correlation ) is the R2, generally  higher the  R2 stronger is the relationship. In the financial/ marketing  fields this could be as high as .7 even .9,  whereas in the drug discovery  .05 is considered to be a decent number. Machine learning computer algorithms like Neural Networks can model complex relationships even when they  are not obvious or even when do not seem to be plausible.

This is where the problem arises. High correlation number is does not imply that one causes the other. This  has to be proved by logic, theory or prior knowledge. This is where even experienced scientists sometimes tip over. This seems to be the case in this context. Princeton researchers in their study modeled spread of  social networks on spread of contagious diseases. On seeing steady decline of  web search for the word ‘Facebook’ they concluded that Facebook will cease to exist by 2017. The reason for this finding was  quite simple; most users have Facebook app on their phones and have no need to search for this key word anymore.
This is the classic case of  equating  correlation with causation.

One famous  example to explain this concept is the  following story.  Statistical study  of shark attacks at a certain beach indicated that there is good correlation between amount of ice cream sold and number of shark attacks. So, it was concluded that eating large amounts of ice cream causes  increased shark attacks.

The reality was more mundane. During some summer months due to  dwindling food in their traditional hunting grounds sharks come closer to beach looking for food. During the same time of the year,  number of  sun bathers and  surfers thronging  the beach  exploded. They became easy target for sharks looking for food.   And during hot  summer months sunbathers consume lots  of ice cream.

Another similar case  study is the near perfect correlation (R2=.97) between fresh lemons imported from Mexico into US and total US highway fatality rate.

Posted by: qmaxim | January 10, 2014

US sun is not setting

Last week Vivek Wadhwa, a leading technology futurist wrote a blog – ‘They’re Wrong: The Sun is Rising, Not Setting on America’. This received  huge  response from netizens.
I also commented, my comments appear below.

There is no doubt that US is uniquely positioned to develop and  lead  innovation in the coming years.

Assuming some of the technologies mentioned gain traction  there will be several consequences.

–          As the manufacturing systems gain in smartness and become more automated  there will be two class of workers. First  class would be unskilled laborers. They will be in majority as the skills required to run operations will see a steady decline. Second class of workers would be highly skilled engineers and technicians needed to build, program and  maintain these smart machines.
Life  for the  first class of workers will get tougher day by day & income  will steadily decline.  There will be shortage of second class workers and their income will see a sharp spurt. Due to this  shortage, many aspects will get outsourced to other countries. Some of these trends are already being seen.

–          Not all the manufacturing is likely to shift back to US. Manufacturing which is  low tech., high on carbon foot print or labor intensive  will continue to be made in countries such as  China, India, Indonesia. These constitute large part of manufacturing economy.

–          Availability low cost natural gas in the US is also  likely  lead to increased growth of  chemical industries for which natural gas is a feedstock. There is more value addition in utilizing natural gas for this purpose as compared to  electricity generation.

–          Due to US becoming nearly self sufficient in oil  in the next few years, there will be less and less support in the Congress & the public for military interventions in places like the Middle East.

–          As the number of connected devices increases greatly due to technologies such as internet of things &  and due to ubiquitous nature of these technologies,  concern about the privacy is going to see a sharp increase.

Finally, due to bitterly divided US congress,   there is no guarantee that legislation  required to make some of  these technologies bear fruit may get passed  soon.

Recently I read  the following book : R Statistical Application Development by Example Beginner’s Guide by Prabhanjan Narayanachar Tattar, published by Packt Publishing U.K.

Here is my review of the book:

R  is a open source statistical programming language suited for data analysis, visualization , data mining & for learning Statistics.  Due explosion of  data in the recent years,  R is gaining great traction.

Dr Tattar has a written a book for beginners who want quickly get going on doing data analysis at the same time gain some knowledge on programming  using R. The book has following chapters – basic R data types, importing/ exporting data, Data Visualization, Exploratory Analysis, Statistical Inference, Linear Regression Analysis, Logistic Regression Model, Regression Models with Regularization, Classification and Regression Trees, CART (a machine learning technique).

This book is written in easy to understand and friendly  format. It is meant  for learning R as well as the understanding basics of Statistical Analysis. Emphasis is on using the techniques to draw useful conclusions rather than on heavy theoretical details. R code and interpretation of results of analysis  is explained  in clear to understand lucid style.

Book covers topics from basic concepts to fairly sophisticated model building techniques. I found some of the chapters particularly good, for example, on Regression models with  Regularization.

Overall this is a  good book for a beginner in the field.

Posted by: qmaxim | June 24, 2013

Falling importance of quality?

Some time ago, CEO of American society for Quality (ASQ) posed couple of thought provoking questions in his   blog  post on future of quality and that of  quality professionals.

First  question was about  the  challenges faced by quality community  and   second one is about advancing  state of quality for the benefit of society. A. Tiwari’s  responded in this blog post.

My response has a slightly different perspective. I have  tried to answer  by linking these questions  to some of the irreversible  trends happening in the business world today.

          Today’s big innovation & high quality becomes the commodity of market place of tomorrow. Pace of innovation has accelerated.  

          Quality levels in general  have been continuously improving no doubt due to contribution of quality Gurus (such as Juran & Deming) but also due to contribution of ordinary quality folks.  Consequently, it is almost impossible for a single company to hold on to quality edge for  too long.

          Prof  Noriaki Kano’s famous customer satisfaction model is more relevant as ever. Quality attribute which delighted  customer  yesterday becomes the must have attribute of today. Not aligning with changing customer  expectations   could lead to customer dissatisfaction & consequent loss of business.

          Due to rapid advances in technology, speed of processes have increased great deal and level of manning required for performing the same task is coming down rapidly. On the other hand, skill levels required to run the show has been constantly going up.

          Though there is some talk about reversal  of the trend,  global supply chains have come here to stay. Work goes to the most efficient and economical.

To survive and thrive in this challenging  environment everyone has to change his behaviour & adapt. Quality professionals are no exception.

One of the most important foundations of  Quality is  continuous improvement. To do improvement availability of  good quality data is a must. Numerous tools & methodologies are  available for doing data analysis & improvement. Though the number of available   quality tools / have not increased much in the recent years, amount, sources & speed of availability of  data  has increased exponentially.  This data deluge is the called big data.

To facilitate improvements projects under these circumstances, use different types of technologies/ techniques have to used to extract  this data.
Some examples of new technologies – 

          use of NoSQL  instead of SQL to query unstructured data which is not in the traditional data table  format.  

          Data mining techniques like  Machine learning which relay on computer programs themselves to find patterns in data.

          New software frameworks such as Hadoop which can be used for processing enormous amounts of  data  quickly and cheaply.

          Use of data from social media (such as Twitter ,Facebook, blogs, news-feeds) for understanding customer satisfaction and company reputation.  

          Another emerging trend particularly in manufacturing is – internet of things  whereby machines, products  exchange information in real time.

 Running improvement projects using data from  techniques  such as these  can lead to significant  advancement of quality . Of course, same set of  quality tools and methodologies can be used for improvement projects.

In summary, by changing ones   behavior to the rapidly changing  business environment one can face the challenges head on and succeed. Using modern technologies can lead to advancing state of quality.

 

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