The Indian Economy Blog

V Anantha Nageswaran

A table of inflation rates in many countries around the world is beginning to reveal a disturbing picture. The lowest rate is found in Germany – at 3.0%. Many emerging countries that seem to be doing a truthful job are reporting inflation rates in excess of 10% and some in excess of 20%. Others, either out of deliberate intent or methodological deficiencies, report far less. India belongs to the latter category.

Inflation is the world’s number one problem. Governments are pretending to respond. In the UK, Mr. Gordon Brown wants to assemble experts to debate solutions. The Indian finance minister says that western nations are diverting land for producing expensive bio-fuels to replace the expensive crude oil. Surely, that is part of the problem. But that does not explain the jump in the price of rice. Rice is not diverted to bio-fuel production.

In India, the response has been to reduce import duties, impose export caps and accuse manufacturers and distributors of collusion and cartel-like behaviour. Different ministers speak in different voices. Together, these pronouncements do not constitute a policy whole. (more…)

The Four Seasons launches in Mumbai.

This bit is stunning -

Bureaucracy and a shortage of skilled workers make building hotels difficult - the opening of the Four Seasons was delayed by at least two years. The hotel needed 165 government permits - including a special licence for the vegetable weighing scale in the kitchen and one for each of the bathroom scales put in guest rooms. In the end, the hotel cost $100m (euro 64.5m, pound 51m), or about $500,000 per room, and prices - which start at $500 per night rising to more than $1,000 - reflect that
.

(Emphasis mine).

Cross posted on Smoke Signals and my blog.

Pramti Pal Chaudhuri, Senior Editor of The Hindustan Times joins IEB as a contributor. You can read more about him on the Authors page.

There are two special things about the ongoing elections in Karnataka. The first is the presence of a large number of real estate developers in the elections. The second is the virtual non-existence of corruption, rather the removal of it, in party manifestos. These two points, I believe, are not independent. Under the current system, political parties are forced to rely on black money to fund election campaigns. For people with black money, election funding is an extremely lucrative investment, and with the right bets or good hedges, can give excellent returns.

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He advocates a false morality to disguise his government’s failures

Dr Manmohan Singh the prime minister has routinely relied on platitudes (instead of on incentives) to motivate the UPA government’s policies. But he is getting even the platitudes wrong. In a country where the average annual per capita income hovers around an unacceptably low US$1000, he wants people to earn less. Why? Because, according to him, earning less, and expecting to earn less, is a national duty.

By equating a degree of self-sacrifice with national duty, the PM has tried to make a moral argument. He has said that this is what corporates and highly paid executives owed in the endeavour to contain prices and keep the overall growth momentum on track. While this has a populist touch and will appeal to an opinion that is ready to view corporates as “fat cats”, private employment is increasingly the preferred option for most educated persons.

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Long-time reader Joydeep Mukherji sends us this (via email)

This article talks about a program for Jains to donate money to help teach Jain students for free. It seems like a nice idea. Perhaps other groups (Patels, Jats, Chettiars) can follow their example. However, it may be a bad idea if you think that such charity should be open to all, not confined to one group. The latter is more equitable but it may not generate the level of donations that a more focussed program might generate. Perhaps this is something your blog should debate?

Comments are open.

The first Africa-India Forum summit was held at New Delhi earlier this month. There were several other events organised on the sidelines of the Summit: the first ever India-Africa Editors Conference, joint performances by Indian and African cultural troupes a seminar of intellectuals from Africa and India on India-Africa Partnership in the 21st century, a programme for youth and women from Africa and a business conclave. The summit, which was a culmination of several levels of dialogue, is already being considered a success in many quarters. It is hoped that these events will create an enabling environment for upgrading economic cooperation between India and Africa.

The events had their share of coverage in the mainstream media– Indian, African and western. However, the landmark event deserves much wider appreciation and analysis than provided by the perfunctory news reports covering the events.

On one hand, western analysts tend to see all major Indian initiatives on Africa, including this summit, through the prism of competition between the burgeoning economies of India and China. On the other hand, many African commentators have warned their own leaders about India’s intentions in what they have disparagingly labelled as a “second scramble for Africa”. (more…)

There was a post on IEB in December 2006, on whether there was a bubble in Indian real estate (Link), courtesy IEB reader Annamalai Veerapan.

16 months later, Annamalai is back with a follow up post on the real estate bubble. It is reproduced below in full –

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Who owns real estate loans in India?

I’ve been waiting for some official confirmation of the bursting of the real estate bubble in India. Although bursting of the bubble (or even the existence of it) is still just hearsay, it is widely accepted that Indian real estate market is stuttering (to put it the best way I can). This article in the New York Times puts the depreciation in New Delhi and surrounding areas at 20%. I thought this is a good time to do a followup on my first post on Indian real estate.

In the midst of the bursting housing bubble in US, UK, Spain, Ireland ..etc., sub-prime has become a common word (it also was nominated as the word of the year). There are several articles, blog entries and web sites detailing the life cycle of a mortgage loan in these countries, especially in the US, talking about how these loans are converted to Mortgage Backed Securities (MBS) and packaged as Credit Default Obligations (CDO) and sold to hedge funds, central banks, private investors and investment banks. Although it is not exactly known who owns how much of the toxic mortgage loans, at least we know what happens to these loans in a general sense. This is very important in the current scenario for any kind of safe investment in the stock market or even to have a decent understanding of the current complex derivative based economic environment.

I’ve been trying to find out what happens to a mortgage loan made in India. Does the bank own it? Or do they sell it as MBS? If they sell it as MBS who buys it? What are the risks for ICICI, HSBC and the other large mortgage lenders in India, if there is a 20% to 50% crash in real estate prices in India? Does India also have a fractional reserve banking system? With the foreclosure process in India not that well defined who will end up holding the bag?

All these questions arise if we assume a deflating housing bubble. I know many readers still feel that there is no housing bubble in India. Let us keep that aside for the time being and let us assume hypothetically that there is a bubble in India and it will deflate 20-50% and and try to answer the following

• What does ICICI/HSBC do with a mortgage loan they issued?
• Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?
• Are mortgage loans in India securitized and sold?
• If yes, to the above question, who are the buyers of these securities?
• What is the foreclosure process in India? How simple and efficient is it?
• What happens when someone defaults on a home loan in India?

I’ve done some (re)search and I will sum it up in the next email/ post.

The Reserve Bank of India is considering launching a Sovereign Wealth Fund which will effectively allow it to invest its excess reserves in higher yielding assets that are off-limits to it right now. This is on the back of the $5 bn set aside in the 2007 budget for the India Infrastructure Finance Corporation. Critics have quickly pointed to the East Asian Financial Crisis of 1997 as to why this is a bad idea. Here is a quick historical perspective.

For much of human history, the trade of Europe with South-Eastern Asia, particularly India and the countries of the Malay archipelago, has been the most lucrative branch of world commerce. The monopoly and control of this trade route was thus much prized by nations, from the early Roman empire, to the Byzantine empire, and later in the 15th century the Italian cities of Venice and Genoa. Then the Portuguese found the sea route around Africa and spent much of the 16th century swiftly proceeding to become the dominant power in this trade, cutting not just the Venetians, but also the Sultans of Alexandria and Constantinople, effectively cutting the supply chain a few layers. It was a remarkable achievement for a tiny country which had to contend with the Italians and the Sultans, and yet built fortifications along the Indian Ocean rim to protect its trade.

In 1580, Spain annexed Portugal in Europe, and the Spaniards, rather stupidly in hindsight, decided that they were not interested in preserving what the Portuguese had worked so hard and energetically to establish - a monopoly of the most lucrative trade route in human history. The reason is interesting.
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Who gets hurt when grain exports are banned?

Swaminathan Iyer took the words out of this bloggers mouth. The UPA government, he writes “has suddenly shifted from protecting Indian farmers against cheap imports to protecting the consumer by cheapening imports”. He is referring to the ban on rice exports (which follow the export of wheat late last year, followed by the ban on export of maize and pulses).

The April 2008 issue of Pragati called for the government to free the farmers. The UPA government did just the opposite—far from allowing Indian farmers to benefit from selling their produce at record prices, the government is forcing them to sell at artificially low prices. So who is hurting the farmer? And why is silence replacing Sainath? And next year, when farmers find themselves unable to repay their loans, the UPA government—if it is in power at that time—will simply increase payouts and write-offs.

In the end the consumers pay the farmers: only the government gets itself into the equation causing unnecessary leakage and wastage.

Unnecessary? Why, isn’t it at least helping curb inflation? Not quite. As Mr Iyer explains:

The lesson is clear. Curbing exports is a form of national hoarding. If every country tries to hoard food, food prices will naturally rise. Governments would like to believe that hoarding by traders is terrible, whereas hoarding by governments promotes the public interest. But the impact on prices is exactly the same in both cases. Indeed, when governments start to hoard food out of panic, the panic itself stokes further inflationary fears.

That is why I am not optimistic about the Indian government’s anti-inflation package. The government thinks it is improving domestic supplies and hence bringing down prices. In fact the government is adding to the global hoarding problem, and stoking panic too. So, expect food inflation to keep rising in coming months. [TOI]

It’s all very well, you say, but what should the government do when poor people can’t afford food? Well, it should buy food grain at market prices and distribute it to those who need it. That way it will least distort the price signals that farmers receive and allow them to benefit from the good times. And by spending taxpayers money in a targeted manner—only the poor will enjoy cheap food—it will spend less. That is, if the government actually wanted to address the policy challenge, and not flail about paranoid of losing votes.

It is widely accepted that India’s education system has and continues to fail the vast majority of its population. Ironically, the country’s success in establishing a globally competitive service sector has, if anything, underscored that failure. Poor quality, however, is not the only problem. The other is access - vast numbers of children simply do not enter the primary education system or leave it too early. Literacy and enrollment are particularly low among women and other marginalized groups. This failure is most glaring when comparing India with China where illiteracy, at least, has been substantially eradicated.

These problems persist despite several initiatives by the Central government to improve outcomes. Increasingly, therefore, liberal economists, international development agencies, and philanthropies have called for a shift towards greater privatization of primary and higher education. In particular, calls emerge to disconnect the funding of education from its operation, through the provision of education vouchers.

Privatization has worked well in several situations in India. Yet as the belief that it works everywhere gains greater currency, there is a need to evaluate if education is also amenable to privatization.

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When Tata Motors launched the Nano it was probably the most globally high-profile move by an Indian auto company. We examined some implications then. We now look at some implications of another equally high-profile event - the Jaguar-Land Rover takeover.

While the Nano was good for brand Tata, getting it noticed all over the world, the acquisition of Jaguar and Land Rover puts it firmly in the map of the Who’s Who of auto brands. The acquisition of these brands by Tata can work wonders for the brand image of Tata Motors as the company that owns two of the biggest names in luxury automobiles. But how does this fit into the overall strategy for Tata as it does not even have a pretense of a presence in the luxury segment even in its home market? The Tatas’ most expensive vehicles on Indian roads are its commercial trucks.

Here are a few thoughts. Not necessarily echoing the sentiments expressed by Tata in public but our analysis of how this acquisition could be made to fit into Tata’s overall strategy.

Toyota is the gold standard that aspiring auto-makers look to. Synonymous with Japanese quality, Toyota got to its premier position in the world auto stakes by a combination of production efficiency, high quality and delivering unsurpassed value to the customer. Toyota fans call a Honda, “a fake Toyota”, seemingly referring to Honda following in Toyota’s footprints and achieving similar status in terms of quality and value. Similarly while a growing company like Hyundai benchmarks its cars against Toyota competitors, a relatively “old-world” company like Volkswagen re-designed its production process based on inputs from Toyota engineers. (more…)

The total strength of the defence employees has risen from nearly 362,000 in 1960 to 1.3 million today. The defence pensions bill, which is over 50 percent of the central government’s pensions bill, has also risen exponentially since the 1960s. It has grown nearly tenfold from Rs. 1670 Crore in 1990-91 to Rs. 15,244 Crore in 2007-08; and is currently over two-thirds of the military salary expenses. The subterfuge of removing defence pensions expenditure from the overall military expenditure, in vogue since 1985, has turned the spotlight away from this issue.

More than three percent of defence employees retire every year. The bulk of this group is of soldiers, who constitute 85 percent of the defence forces. There is an average in-service death rate of 1.2 percent for the defence employees, largely due to counterinsurgency operations. Early induction age and early retirement age implies a younger age cohort for 90 percent of the defence employees compared to their civilian counterparts.

Due to early retirement, the defence employees do not fulfill the government criteria of 33 years service to earn a full pension. This ought to reduce the defence pensions bill significantly. However, the high ratio of 1.68 defence pensioners per defence employee implies an extended period of pension payments, which offsets the lower rates of defence pensions. The other civil departments, incidentally, have a ratio of 0.55 pensioners per employee.

Moreover, Indian population above 60 years of age is growing at a rapid pace, at an annual growth rate of 3.8 percent per annum in the period 1991-2001, as against the annual growth rate of 1.8% for the general population. The improved health care and increased life expectancy will skew the pensioners to employees ratio even further.

The recommendations of the Sixth Pay Commission are likely to push the defence pensions bill further northwards, if the example of Fifth Pay Commission is anything to go by. The implementation of Fifth Pay Commission recommendations had led to an increase in the defence pensions bill from 4947 Crore in 1997-98 to 10770 Crore in 2000-01.

It is believed that the defence pension bill has the potential to reach an unsustainable level, and perhaps even exceed the wage bill. This is borne out by the recent trends and is indicated by realistic assessment of such liabilities in the future years. The government has decided against introducing pension reforms in the defence services.

There is an immediate need to reduce the defence pension bill, which will otherwise continue to be a big drain on the national exchequer. This can be achieved by reducing the minimum military service requirements, pushing for early retirements with lateral absorption schemes and identifying a new model for defence pension reforms. These are desirable not only on the grounds of fiscal prudence and equity, but also to keep the military lean and young.

In an interesting article on Forbes titled ‘The Smartest Unknown Indian Entrepreneur’ , Sramana Mitra profiles Sridhar Vembu, the founder and CEO of an Indian firm called AdventNet. The firm today, is a ‘100%, bootstrapped, $40-millio-a-year revenue business that sends $ 1 million to the bank every month in profits’.

The whole piece is worth a detailed read, but two points stand out.

The first one is this:

“We hire young professionals whom others disregard,” Vembu says. “We don’t look at colleges, degrees or grades. Not everyone in India comes from a socio-economic background to get the opportunity to go to a top-ranking engineering school, but many are really smart regardless.

“We even go to poor high schools, and hire those kids who are bright but are not going to college due to pressure to start making money right away,” Vembu continues. “They need to support their families. We train them, and in nine months, they produce at the level of college grads. Their resumes are not as marketable, but I tell you, these kids can code just as well as the rest. Often, better.”

(Emphasis mine).

The second one is this:

Vembu has a very exciting opportunity ahead of him. What the Chinese have done in manufacturing, he is showing that the Indians can do in software: undercut U.S. and European software makers dramatically. Not in information technology services. Not by body shopping. Vembu has done something few Indian entrepreneurs have been able to achieve–build a true “product” company out of India. This is not a head count-based business model

(Emphasis mine).

The first point is interesting, as it shows that the skilled manpower shortage, which is an issue many entrepreneurs (including IEB founder Prashant Kothari) have written about, could have some solutions, although a nine month investment from an employer is significant.

The second one also shows that the general media meme of that all India is doing is capitalizing on low cost labour advantages to run body shops, and not building enough ‘brands’ or ‘product’ firms, might not be true(even if it were true to large extent till a few years back) .

So the UPA government is set to improve credit availability (and write off loans) for farmers. Laveesh Bhandari tells you why, if improving the livelihood of farmers is a policy goal, the Manmohan Singh and P Chidambaram are barking up the wrong tree.

Here lies the crux of the matter. If use of new seeds, fertiliser use, irrigated land, cropping intensity, and private capital stock growth are not rising fast enough, then where is this credit going? To put it another way, what is the Indian farmer doing with the extra credit if he is not using it in seeds, fertiliser, water, capital or land? [IE]

Should foreign law firms be allowed into India?

No, says Cyril Shroff, Managing Partner of Amarchand Mangaldas, one of India’s largest law firms.

Amarchand and other large Indian law firms have benefited immensely from liberalization in India. However, when it comes to opening up the legal sector, here’s Mr Shroff touting shibboleths like a good old protectionist from India’s socialist past. Unfortunately enough, Shroff’s self-serving arguments have a pedigree in India. They spring from the same well as Rahul Bajaj’s Bombay Club, or its older cousin, the Bombay Plan, and to that extent are somewhat predictable.

Shroff’s hypocrisy is galling. However, in my opinion, even more appalling is the mediocrity of the writing and the flimsiness of Shroff’s arguments — blanket claims not backed up by any evidence, non-sequiturs galore and a lack of logical coherence. Is this really one of India’s best legal minds?

For instance, take this piece of bombast, “the law ministry’s proposal in its current form cannot be accepted”. Ummm… this proposal cannot be accepted by whom, exactly? Not to be too snarky but the mushy, vague pabulum which characterizes the entire article would fit well here.

Or the “national interest” line that Shroff trots out several times in his essay, almost like a mantra. One wishes that Shroff took the trouble to spell out exactly why the entry of foreign law firms is inimical to India’s national interest.

The tour de force might well be Shroff’s claim that “the sole pressure (behind foreign law firms’ interest) is that of a lucrative market and market access. Nothing else.”

I’m shocked. Shocked! Those greedy, money-grubbing foreign *#$% lawyers! Of course the foreign firms in other sectors that are making a beeline for India are not really interested in market access or such like. Not as long as they keep paying big fees to Amarchand Mangaldas’ and their legal brethren, I presume.

Scour the article closely and you’ll notice that one constituency Shroff hardly mentions are clients, which is telling. Why doesn’t Shroff bother discussing what consumers want, and whether the entry of foreign law firms is in their best interests. After all, that’s the litmus test, isn’t it? But nope. Shroff takes it upon himself to declare that there is no pressing need to permit the entry of foreign firms.

When it comes to his next essay, I suggest that Shroff take a page or two from Bastiat. At least, we’ll have something to laugh about.

The original article isn’t accessible on the Business Standard web site , thanks to linkrot. I’ve reproduced Shroff’s article in full after the fold (emphasis mine).
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About a month back, I’d written that farmers in Karnataka, when faced with a glut in the tomato crop, elect to throw sack loads of tomatoes on the highways, rather than selling them. During the great depression in America, sack loads of wheat were burnt in order to prevent wheat prices from falling. During the India-Pakistan test match in Bangalore 2 months back, an entire stand (south east i think) was left completely unsold. All these have a common thread of logic - artificially restrict supply so that prices don’t crash, and you make more money.

Yes, I understand this is counterintuitive. How can you expect to make more by selling less rather than selling more? How can you expect to make more money by destroying what you’ve produced after investing thousands of rupees? Here is my take on the same. I’ll start with the necessary conditions for this kind of a situation, and then proceed to try and explain why this works. And then I’ll try and explain how some policy changes can help avoiding wastage.

1. Monopoly: A monopoly is essential for implementation of this kind of a situation. It is easy to understand why. Suppose there are multiple independent suppliers. Who is going to dump their stock? What is the incentive for you to dump your stock? You would rather that your neighbor dump his stock which is going to increase your profits. The only way out of this is in collusion. All producers get together and decide to dump stocks. Which effectively creates a cartel, and thus a monopoly. (more…)

Chandra Kochar, joint managing director and chief financial officer of India’s largest privately owned bank, $80 billion ICICI Bank, is bullish on India growth story. She contends that the growth in India is shifting from consumerism to manufacturing and infrastructure.

In the last five to seven years, India has grown on the basis of its knowledge economy and consumerism. The IT industry, and its related industries, provided jobs for Indians. As Indians earned more, they spent more, and that’s how consumerism drove economic growth as a whole and also led to a huge growth in the retail-credit and consumer-credit business in India. As we peak today, this growth in consumerism is leading to a huge investment cycle in India. Because manufacturing capacities have been fully utilized, and infrastructure needs to be established, people are now investing in manufacturing capacities and infrastructure. I estimate the Indian corporate sector has plans today to invest about $700 billion in manufacturing and infrastructure, which will be spent over the next three years. The next wave of growth for India is going to come out of capital investment.[IK@W]

The Indian government has already accepted a little dent in its prospective growth rate this year. It is widely believed that India’s internally driven growth, has increasingly decoupled its fortunes from the US economy. It is certain that an US slump will impact India to a lesser extent now, than it might have done a few years ago. Indian companies are more resilient than ever to a global downturn these days, with lower borrowing costs and healthier debt-equity ratios. Nevertheless, there are some challenges.

Inflationary pressures loom on the horizon. Inflation triggered by higher food and oil prices could deflate the rapid economic growth curve in India. The tight monetary policy of the RBI is related to inflationary pressures. With large-scale credit contraction in the Western markets, the growth plans and capacity expansion at Indian companies will find it difficult to access overseas credit .

The uneven growth in the middle to short term, with the states of Madhya Pradesh, Orissa, Uttar Pradesh and Bihar having seen lesser growth than others, has led to increased social and political tensions. The increased spending on social sectors and populist largesses in the election year, including recommendations of a new pay commission, can also impinge on the growth story. This spending, however, can be met by the dramatic increase in direct tax collections (by over 40% in each of the last two years).

As a banker, Kochar can probably view certain propitious omens that most other economic commentators in this country cannot. The jury is, however, still out on her hypothesis and previsions of a sustained growth rate for the Indian economy.

The economic benefits of a space program are a continuous source of debate. In India there is the constant suggestion that the thousands of crores spent on ISRO’s adventures should be utilized elsewhere. Here are some thoughts on why a space program makes economic sense.

Everyone knows that a space program offers great advantages from a defense perspective - think satellite reconnaissance, rockets and missiles. Since defense is the primary function of a government, that by itself should justify investments in space. There are political benefits too. Every achievement in the space arena increases the prestige of the nation internationally. More important is the pride the citizens feel as this promotes solidarity and national identity. For the sake of an economic argument though, we should keep defense and political considerations aside. So the question boils down to this: does the pursuit of economic security mandate investment into a space program?

In the short run: Spin-off Benefits

A space program generally involves the development of cutting edge technologies. Even if something has been done before, and particularly if it has been done before, it can be done in a more efficient manner. Till 2005 ISRO had received 150 patents (not all international) and equally importantly had transferred 268 technologies to industry. In an age where we cannot compete with China on producing new PhDs and fall woefully short of the developed countries, it makes sense to invest good money on a space program if it can generate technologies which Indian industry can commercialize. In a way this would optimize meager resources.
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The relevant question is not Who are we going to trust but What are we going to trust?

Arnold Kling wrote a freewheeling essay last year Should You Trust the Government? in which he points out

In the case of government, there is good trust and there is bad trust. Good trust is trust in processes that promote public service. Bad trust is trust in the virtue of leaders or the wisdom of voters.

Trusting the virtues of government leaders is a bad thing. It leads one to cede rights and powers to government that are easily abused. The more that our ideology demands virtue from leaders, the more likely it is that our leaders will prove to be evil.

If you can trust the processes of government, then that is a good thing. Good trust in government is based on processes that provide for accountability, checks and balances, equal protection, and punishment of official corruption. [emphasis mine]

Is India circa 2008 better off vis-à-vis 1950 with regard to the processes that Arnold lists above? My answer would be yes. After all, the percentage of the population that’s literate and educated is much higher. The media’s reach is far greater, especially thanks to the advent of TV. And a lot of the other factors that ensure checks and balances are probably stronger today. While there’s a (very) long, uphill road to climb, I’d aver that we’re better off today. However, many people that I know, if asked to choose between the governments of 1950 and 2008 would opt for the 1950 version.

Q) Do you think the processes that make for effective governance have improved over the last six decades? Were things really better back in 1950 or are we romanticizing the past?

Previous posts in this series: 1, 2 and 3.