“For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving,on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to.”
Paul Krugman

With results still coming in, projections show the United Progressive Alliance is likely to win about 250 seats, making it a shoo-in to form the next government and provide continuity, a stable administration and progress on key economic and corporate reforms.
Wall Street Journal, May 16 2009

Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty…..Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third largest economy.
Bloomberg, May 18 2009

Many are called, but few are chosen, as the saying goes. But could it just be that this time around, and on a one-off, never to be repeated basis, India might find itself right there in the midst of things, with a 50-50 opportunity to add its name to that select and noble band, the chosen few. After all, someone has to lead the next global charge? The majority of the developed economies are either bogged down in the substantial quantities of debt that they desperately need to pay off, or weighted down by those elderly populations who are weakening consumption growth and leading to export dependence (Germany, Japan…). And as Krugman humorously points out, someone will have to add the extra demand which will allow global trade to start to grow again, so why should India not supply a significant part of this new demand, after all we are more likely to find consumers in India than we are on Mars. (more……. )

In today’s slow economy, where government is trying its best to keep the real estate market rolling and attracting investors to invest in real estate market in order to keep market live, I had an idea through which it can be achieved by government without loosing anything. Presently, the deciding period of differentiating a CAPITAL GAIN as Short term or Long term is 3 years period. If one sells his new house in less than 3 years and incurs profit, the gain is termed as Short term capital gain. And if he sells his new house after 3 years and incurs profit, the gain is termed as Long term capital gain. Now there is no way to avoid tax in short term capital gain, whereas there is way to save tax in long term capital gain, if the profit incurred is re invested in another residential house of price more than the profit.

The above way of saving tax from long term capital gain will help in rotating money in market to some extent, as it will result in at least two transaction of selling and buying a residential property. Considering this advantage, if Government can REDUCE The differentiator period from 3 years to say 2 years, then the market player who might be waiting for next year to sell his house to re invest, may do it so today and in a way will improve rolling of transactions in Market. Government will not loose anything , but will just be helping in moving the selling environment for its public to one year sooner. ( later on when economy improves, the years can again be raised to original 3 years )

IEB reader Piyush Goyal (pgoyal77@gmail.com) sent in the following comment -

Good idea without working out Revenue ramifications for the Govt. – Decreasing revenue would lead to further increases in deficits. Not a desirable side effect of the Capital Tax change prescribed.

Real estate in India was a bubble that needed to be pricked and was rightly so in this current market turmoil. The bubble was largely an effect of $’s looking for homes. As $ flow reversed course (for a myriad of reasons including margin covers, unwinding large diversified derivative positions etc etc), the bubble burst. My guess is that the affordability index of residential properties reached heights never seen in the Indian market during this bubble and popping of the bubble was a good thing. The 3 year lockdown on Cap-Gains is a great policy that needs to remain. MY TAKE – Real Estate (Residential Real Estate) should in a country like India never become an investment asset. No more Cap Gain benefits, not even after 3 years holding period.

One school of thought blames the “CapGains Clause” and “Income Tax gains on Interest Payments” as the excacerbating cause of the bubble in the Real Estate space in US and the resultant crash.

As the situation around the globe/US improves over a period of 3-4 years, the tremendous amounts of $’s being printed by the US Fed will once again look for homes to park and India will once more be ripe for a bubble of sorts in the RE space.

India needs to manage not just this current slowdown but also the impending bubble that might follow. Monetary policy cannot be ad-hoc and directed towards one marketplace or another, but deliberate and planned affecting prices across the economy – It should not cause bubbles and rolling recessions, instead should be used to smoothen the growth rate of the economy/GDP to Trend Growth Levels. Price stability is tantamount not fixing a market or two.

The sincere thoughts of the writer are appreciated but slowdown in a sector (mostly irrelevant and excess prone sector like RE) cannot and should not be cause for myopic policy – Long Term (Medium Term at the very least) price stablity should be the goal of both Monetary and Fiscal policies.

What is the biggest lesson from the Great Depression? In my view, it is that monetary policy and the financial sector play a crucial role in economic development. Let me put it more precisely: good monetary policy is unlikely to accelerate the speed of economic growth – after all we have more income year after year because mankind comes up with new ideas, with new products, with more efficient ways of producing output. However, bad monetary policy can easily derail economic development. It is true for rich and poor countries alike.

Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit $100 in a bank, the bank keeps, at most, two to three dollars in its vaults (in fact the money is often in the central bank), the remaining $98 or so is lent to a borrower.

Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non-performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On the top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.

And one thought like Ilian that this would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics [especially of the petty and partisan variety] eats policy for lunch seven days a week.

Since then, the government has collected Rs.74972.36 crore as cess, but only Rs.902 crore has been allocated to the Oil Industry Development Board (OIDB) that is supposed to disburse the money to the industry.  In fact, the last allotment of Rs. 95 crore to the OIDB was done in 1991-92. The balance money has gone to the Consolidated Fund of India and added to other revenue accruals.

The cess was doubled in 2002 from Rs. 900 per tonne to Rs.1800 per tonne, and further increased to Rs. 2500 per tonne in 2006, on the ground of providing subsidies to LPG and kerosene. As per the Oil Industry (Development) Act, the amount collected by levying cess on indigenous crude is to be utilised for the development of petroleum sector; the cess was never intended to cover subsidies – either directly or through oil bonds.

Cess is only applicable to pre-NELP [New Exploration Licensing Policy] blocks or acreage given to national oil companies (NOCs- ONGC and OIL) on a nomination basis in which the licensee may be one of the NOCs. The blocks that pay cess on oil are: nomination blocks held 100 per cent by NOCs (for example, Mumbai High), joint venture blocks that were awarded as field development contracts (such as Mukta, Panna, Ravva), and exploration blocks that went on to production (such as PY-3, CB-OS/2).

Now that the petroleum sector has been deregulated and opened for private sector, there is no justification of continuing this cess at all. The private companies still pay about half the cess not paid to the government as increased profit oil [amount of production paid to the government under the production sharing contract] and corporate taxes. Recent newsreports indicate that-

The government is obtaining legal opinion for imposing a special oil tax on the domestic crude oil production under the New Exploration Licensing Policy (NELP). The proposed tax is supposed to kick-in after price of domestically-produced crude oil crosses the $75/barrel mark. While public sector oil producers like ONGC and Oil India would have to fork out to the government 100% of additional realisation beyond the cut-off price, private companies like Reliance Industries (RIL), Essar Oil and Cairn India would be required to pay 40% of their windfall gains.[ET]

Cess, customs duty, excise duty, sales tax, education cess, pollution cess and now a special oil tax. Considering the amount of revenue collected by the government[central and state], the net subsidy provided  to the public on petroleum products is only a political statement, with insignificant net financial entailment.

Coupled with the charade of Oil Bonds, the cess imposed on the indigenous crude oil produced by NOCs is an implicit arrangement of meeting the subsidy burden and artificially containing government’s budgetary deficits. All these measures are but an indicator of the byzantine and befuddled nature of the government budgetary process. It is time someone took up cudgels to streamline and simplify the convoluted government fiscal setup, both of revenue collection and of expenditure.

There are three duties/ taxes collected by the government on the sale of petroleum products. The state governments collect the sales tax while the excise and custom duties go into the kitty of the central government.

Now, let us take a look at the actual revenue collected by the government from excise and customs and subsidies provided via the oil bonds and direct subsidies on LPG and PDS kerosene. During the last three years:

The government has now announced that it will issue oil bonds worth Rs 94,600 crore in the fiscal year 2008-09. If the revenue collection rises at the same rate, it would be to the tune of around Rs 77,000 crore in 2008-09. The subsidy for kerosene and LPG is at around Rs 3000 crore. So, the government will suffer a net loss of nearly Rs 20,000 crore in providing petroleum products to the citizens of India. Phew! 0.4% of GDP wiped out in one go.

These figures might themselves portray a wrong picture. For the first quarter of 2008-09, the government had decided to issue bonds worth Rs 24,500 crore while estimated losses of the Oil Marketing Companies (OMC) were at Rs 52,000 crore during the period. Moreover, the government’s share of meeting under-recoveries through oil bonds is now 57% from the earlier 42.7% of the total under-realisation on fuel sale. Another 33 per cent comes from upstream companies like the ONGC, GAIL and OIL. The remaining losses are borne by the OMCs themselves.

These oil bonds are a very neat short-term solution that pledge our tomorrow for a cosy today. The interest rates at these bonds are estimated at around 8.75 to 9.5% and reports suggest that the RBI has now stopped purchasing them under the special market operations(SMO). Under the SMO, the central bank used to buy the oil bonds directly from the OMCs and pay them the equivalent amount in dollars, allowing them to buy supplies. In the current year, the interest burden on the oil bonds is budgeted at Rs 5520 crore. With the  issue of oil bonds this year, this burden will become onerous and will cost the exchequer around Rs 13,000 crore in the next fiscal.

All this will add to the burgeoning fiscal deficit this year. But the finance minister, with his wizardry, of keeping the oil bonds out of the official fiscal deficit, will still be able to peg the the fiscal deficit at 2.5% of the GDP.

The more prudent mechanism of granting statutory liquidity ratio (SLR) status to the oil bonds has also not been accepted by the government. The SLR status gives immediate relief to OMCs by way of liquidity induced by participation of bigger players like banks, gilts and mutual funds, apart from existing pension, provident fund and insurance players that trade less and hold on to the papers till maturity (around 10 years). The SLR bonds are highly secured and liquid in nature as they are sovereign guaranteed. SLR bonds are those issued by the government at market rates to fund its various borrowing activities every year. Banks are required to subscribe to them, as they are mandatory requirement stipulated by the Reserve Bank of India. Currently, banks maintain 25% of their net demand and time liabilities in SLR.

Thus, while free pricing mechanism for oil products in India remains a pipe dream, granting SLR status to oil bonds seems to be the judicious course of action. However, the bonds that typically come under SLR, or statutory liquidity obligation, form part of the fiscal deficit. The government, bound by the FRBM act, is thus avoiding the SLR status for oil bonds like a plague.

There is big trouble with this sanctimonious approach of the government towards maintaining the fiscal deficit within the stipulated target. A similar exercise at fudging the balance sheets by a corporate house would have attracted the ire of the government auditors. Keeping the ethics of governance apart, the present approach has far-reaching implications for the oil industry. OMCs will continue to bleed and the cost of burden-sharing on the part of the upstream companies will rise. Both will become victims of a serious financial crunch, which will adversely hit their plough back and investment plans.

The government, too, will not emerge unscathed. This resort to oil bonds, besides being blatantly unethical, is neither fiscally prudent nor does it tackle the problem posed by spiralling oil prices, falling growth rates and rising inflationary pressures effectively.

Update – Vikram S Mehta in today’s Indian Express asks some pertinent questions on oil pricing:

…why does the government persist in appointing committees comprised of professionals to address what is essentially a political subject? Surely they must know that no individual worth his professional salt can help the government skirt the political conundrum of volatile petroleum prices. Why does the government not now contemplate kicking the ball into the court of the politicians? After all if there is to be progress it can only be if the politicians resolve somehow the political dilemmas of oil. My suggestion is that the next committee on petroleum should comprise of politicians and should be asked to come up with bold and practical suggestions on ‘how’ to implement what everyone knows must be done.

Update 2 (September 04) – Urjit Patel, writing in the Business Standard, highlights the dangers of RBI acting as an oil spigot and contends that the scenario is emblematic of the insidious distortions in virtually the entire energy chain.

It is estimated that oil bond issuance over the current fiscal could be about 2 per cent of GDP; therefore, the money due to the oil companies from the Union government is expected to be huge for the foreseeable future. Unless there is a sharp correction in oil prices or a policy combining adjustment in domestic retail prices and reduction in government duties, the oil companies will continue to require help to source the foreign exchange to import crude oil (although the SMO has been ascribed as a temporary facility). If demand does not adjust, supply will; reports of long lines at diesel pumps in several states show that the oil companies are responding in a manner that is feasible for them. In some parts of the country, demand for diesel for generation sets has increased after the recent price hike because electric supply shortages have intensified. The whole scenario is emblematic of the insidious distortions in virtually the entire energy chain in India.

Several conclusions and observations can be made. First, the dire fiscal situation that the central government finds itself in has now sucked the RBI in its vortex, but it is to be hoped that a durable alternative mechanism will be put in place with alacrity to ensure that the SMO is not further resorted to; it can be argued that some of the hard work over the past decade to ensure that the RBI’s proximate objective for conducting monetary policy is not compromised — by getting stuffed with government paper — has been undone. Secondly, we would be hard-pressed to name another country (even among those that subsidise fuel) that has had to resort to the central bank in this manner. Thirdly, praying for international crude prices to adjust sharply downwards soon does not constitute government policy, sound or otherwise. Fourthly, the proceeds of the oil bonds upon maturity will be in rupees, hence the RBI, if it wants to rebuild official foreign currency assets to make up for the decline on account of the SMO, will have to intervene in the market at the time and buy foreign currency at the ruling market exchange rate (the central bank shoulders an exchange rate risk if rebuilding foreign currency reserves is an objective).

All non-plan expenditure heads excluding interest payment, repayment of debt, defence capital, salaries, pensions and the finance commission grants to states will be subjected to a mandatory 5 per cent cut.[IE]

Does it really matter? After all, the unutilised amounts of defence expenditure for the tenth plan [2002-2007] were 14.46% of the total allocation.

Chicanery, in its purest, unadulterated bureaucratic form…

What is interesting in Daniel Yergin’s FT piece is that he deftly sidesteps the question of predicting the future for oil price—near-term or in the long-term. In recent years, he has been proven wrong. His Cambridge Energy Research Associates (CERA) has been bearish on oil since 2004-05.

More important rather than interesting are his comments on the skyrocketing cost of everything from rigs, to ships to technical and skilled personnel. Clearly, for many reasons, the world needs to slow down. Central banks (or more precisely, governments) are unwilling to let that happen. The result is going to be more inflation (for a year or two) and less growth and eventual deflationary bust.

There is no dearth of commentary that predicts an imminent end to oil price. Usually, things happen unexpectedly, just as the rise of oil price itself to present levels. Now that every one and his dog is praying for or predicting a collapse in oil price, I wonder if it would happen now.

In any case, here are two samples of commentaries that call the oil price unsustainable:

In fact, John Hussman finds the contango in crude oil futures as heralding a big slump just as it did in 2006 when the price of oil dropped from around USD 80 to USD 55 per barrel.

He has exited his position in crude oil and has reduced his position in precious metals to 2%. How he proposes to reconcile that with his bearish stance on equities in the U.S.A is something that I have not been able to ask since I do not have his email address. Then, there are the comments by Mr. George Soros. He blamed it on speculators. One Michael Master in his testimony to the US Congress on the oil price spike. He has said that it is caused by index investors.

I do not recall hearing of him before this testimony. Suddenly, his name is everywhere.

It is not clear if these prognostications confuse wishful thinking for forecasts, for buried within its crevices, the Wall Street Journal carried an article on the oil producers shipping less crude than before.

This article refers to the rising consumption in Saudi Arabia and the rapidly declining export from Mexico. It is an interesting read and manages to finish on an optimistic note, somewhat inexplicably (i.e., that is falling oil price). Brad Setser makes an interesting point that this article was buried too deeply in the inside pages of WSJ than it deserved to. See this interesting post by Brad Setser.

Talking of inexplicable conclusions that did not flow from the discussions that preceded it, this paper by researchers by the Federal Reserve Bank of Dallas does the same thing. It argues, explains and convinces us that oil prices are justifably high. Then suddenly it concludes that sustaining triple-digit prices would be difficult.

It is funny and a different story that different people have different persons in mind for “speculators”. If you add them up, just about every one would be deemed a speculator while, of course, all those who invest in stocks that sustain Wall Street are fundamentally driven, analytical and rational.

I think America does not want to see the price of oil to drop so much that it angers the Sheikhs in the Arabian sands so much that they stop writing cheques for bankrupt Wall Street institutions.

See this article for confirmation on America speaking with forked or multiple tongues on this matter. And see this too.

The first line is a gem: “Hank Paulson, the US Treasury secretary, will invite oil producers to invest their petrodollars in the US while urging them to take steps to curb the price of oil in the medium term on a tour of the Gulf that begins on Friday”.

Once America has finished re-capitalising its financial institutions, it would not be averse to seeing the oil price collapse. In fact, it might even actively conspire to bring that eventuality about for biting the hand that fed them is part of longstanding Western tradition.

Geopolitical gains are not trifle if the price of oil continues to remain high, it would also put paid to any fledgling ambition of China (or even the distant India) to overtake America. At the very least, it would push the time-frame out by a few years and with some luck, few decades:

Credit Suisse’ s Dong Tao wrote in their “Emerging Markets Economics Daily” dated May 30, 2008 that Xu Xianchun, deputy director of the National Bureau of Statistics, has suggested that inflation might not peak until 2009 (p. 15).

The longer the oil stays elevated, the longer the persistence of inflation in China and the greater the policy challenge. In the meantime, more money would keep coming into China in search of appreciation.

Brad Setser estimates the rise in monthly reserves in China at USD 74 billions in April. Given that dollar appreciated in April, the actual sum could be about USD 82 billion, nearly a trillion dollar annual rate! There is no need to analyse this. China’s policy is totally and utterly rudderless. Brad Setser is way too polite on this one.

So, for what it is worth (you might be better off tossing a coin to decide), my forecast is that the price of crude oil would drop to about USD 110-115 or so. That is about it. It would then go back to 150 to drive one final nail into Asian economies, shower riches on West Asia and re-capitalise America. Then, once it has done its damage, the missile would be allowed to extinguish itself or burn itself out (pun intended).

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.

In simple terms, prices reflect the balance of supply and demand of something. When prices go up, it is a reflection – and not a consequence – of supply going down or of demand going up or both. When it happens for just one or few commodities, it is possible to blame middle-men of hoarding or manufacturers of cartel-like behaviour. When it happens in many commodities, it is futile to blame one industry or a few producers.

Usually, the source lies in some policy measures and their implementation. To make it clear, we are not dismissing the importance of factors like climate change, diversion of land for production of bio-fuels and more importantly, stagnation or even outright decline in agricultural productivity in countries like India and China. Again, they explain inflation in food and agriculture commodities. These factors do not explain inflation in crude oil and copper, for example.

If we have to identify a single or the most important explanation for the recent development in prices of many commodities, the answer lies in examining the behaviour of global central banks.

Of course, in any broad-brush analysis or conclusions, there is the risk that we miss the exceptions who behaved differently and correctly. For example, within the constraints imposed by the political system, Reserve Bank of India has done a very good job of trying to shield the Indian economy from the cycles of boom and bust. Similarly, if the Australian and New Zealand economies still face the risk of boom and bust, it is not because of their central banks but in spite of their best efforts.
The bulk of the blame has to be assigned to the American Federal Reserve and the People’s Bank of China. In the case of China as in the case of India and in many other developing countries, the central bank is not independent. It is subject to political influence. The Federal Reserve Board of America is, in some ways, a similar predicament. It is subject to the oversight and pulls and pressures of the democratically elected Congress members. Further, since it was founded by banks actually, it ends up coming to the rescue of banks sometimes to the detriment of the public.

In 2001-2003, it cut the Federal funds rate to 1.0%. It thus rescued the economy from the collapse of the technology bubble in 2000. Thus, it replaced the stock market bubble with a housing bubble. When the housing bubble appeared to be weakening, it refused to tighten regulations and allowed it to continue. Too many loans were made to people who should not have been lent. That is the root cause of the present problem.

In order to address the resulting loan defaults, stress on banks and their balance sheets, the Federal Reserve has allowed banks to borrow at cheap rates from it. Money is available to banks in the open market but at higher cost. Some of the banks might not have survived. But, that would have also left a lesson for other banks that they would not have forgotten for a long time. Excessive risk-taking would have been curbed. Instead, the cheap money is perhaps being channelled into speculation on commodities prices. After all, banks are not going to create more mortgage loans at least for quite some time.

Somewhat different has been the behaviour of China but it achieves the same result. China has kept its currency cheap. Keeping the currency cheap requires interest rates to remain low, in comparison to other countries but also in relation to economic growth. China has done that. Low interest rates means capital is plenty. So, capital-intensive growth has flourished. That has placed tremendous demand on resources worldwide such as crude oil, coal, steel and other industrial metals. It continues to import rising quantities of iron ore, copper and crude oil. Incidentally, it has also led to China supporting many tyrannical regimes in Africa including that of Zimbabwe. Recently, it sent a shipment of arms to Zimbabwe but faced an avalanche of protest and had to recall that shipment.

Perhaps, it is possible that American banks know that there won’t be any change in China’s demand for commodities in the near future, at least until the end of the Olympics. China may be reluctant to change course fearing unknown and uncertain consequences. If so, it argues for further rise in the price of commodities. Both their behaviour and bets might be feeding off each other. That is not good news for the rest of the world.

After all, we cannot influence the Federal Reserve. So, how should policymakers respond? Unfortunately, the answer is that they should respond differently from what they have done until now. Banning exports of agricultural commodities exposes the hollowness of farmer-friendly policies. Farmers should be allowed, with appropriate guidance, to sell to the highest bidder – local or global – and derive the maximum gains from the global shortage. Such a price signal would also encourage productivity improvement in farmland and hence boost crop production. More land would be brought under cultivation. At the same time, poor households – rural or urban – could be directly subsidised with cash transfer to be able to pay the higher price.

The same principle can be extended to the price of hydrocarbon products such as petrol, cooking gas, diesel and kerosene. Consumers and producers should receive the price signal. Without that, their respective behaviours would not change and shortages or glut would persist.

At the same time, since supply of food and other commodities would take time to respond to price signals, central banks should be allowed to restrain demand in the short-run with tight monetary policy. That means higher cash reserve ratio or higher interest rates or both. That might be unpopular or politically unacceptable. But, effective medicines never taste sweet. Only placebos do.

The chances of such sound policies being pursued are close to nil particularly as many democratic governments, including India, approach elections soon. Authoritarian governments do not care much for public opinion.

Given such a low chance for sound economic decision-making, prospects for a sustained decline in inflation should be judged remote. That is not good news as it is a stealth tax on the public and erodes their purchasing power. Consequently, it reduces affordability for many assets. As demand drops, inflation affects revenues for companies and squeezes margins through cost pressures. That does not augur well for the stock market.

The stock market in India has performed well in recent times. Many other global markets have staged a similar recovery. That is due to misplaced optimism on the American economy. As discussed above, right policies would be missing and hence the anticipated quick economic turnaround in America would be elusive. Consequently, risky assets globally would retrace their recent gains. Therefore, Indian stocks would fail to build on their recent gains. On the other hand, the likelihood of continued high global and local inflation would result in a resumption of the uptrend in gold price that has been recently disrupted. Therefore, investors who do not expect inflation to recede know exactly what they should be selling and what they should be buying.

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.

Sectors characterised by “significant market power” in the hands of a few producers have a societal obligation to assist the government in moderating inflationary expectations, the PM rounded off. [TOI]

He has gotten it exactly wrong. The national duty of every citizen is to make as much money as legally possible. Anyone who suggests otherwise cannot have the best interests of the Indian people at heart. Oh, he’s only referring to the top executives, you say? Well, first, depressing wages at the top will cascade down and result in lower earnings for everyone in the pyramid (just as increasing wages at the top will increase wages for everyone). And as a matter of principle, just how does making the rich earn less help the nation? In fact, it does just the opposite. It would have been one thing for Dr Singh to call upon the rich to deepen the culture of philanthropy. But to equate “self-sacrifice” with “national duty” is dangerous nonsense.

Dr Singh shamelessly masks his government’s failure to ensure free, competitive markets—and prevent the build up of significant market power—by claiming that monopolists have societal obligations. That’s dangerous nonsense too. The solution to the build-up of market power is further liberalisation and effective regulatory oversight. Dr Singh’s admission that there are sectors where companies have significant market power calls for moving forward with the economic reform process. Just what happened to the privatisation (okay, disinvestment) agenda?

We have said this before, and we say again: Dr Manmohan Singh has done immense harm to India’s future. The evil that he has done will live long after him. The good was interr’d with P V Narasimha Rao’s bones. Corporate India would do well to ignore the shameless moral poseur. Yes, it’s late in the day for this government. But Dr Singh should go. [See previous calls.]

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.

While Bartholomeo Diaz and Vasco Da Gama were finding the Eastward trade route to India, Spain dispatched one Christopher Columbus on a misguided Westward journey to India. Now the “India” or “Indies” that Columbus found quickly became the exclusive domain of Spain, where they found that they could simply dig up precious metals like gold and silver. They decided that it was good to keep your gold and silver in the country than to use it. And trade with India virtually meant that gold would leave your country and end up in India.

Without the lure of trade, Spain had little incentive (despite stated intent) to prevent the budding merchant powers like Holland, England and France from entering this trade. From the time Sir Thomas Roe got trading rights from Mughal Emperor Jehangir around 1605, the British East India company spent the next hundred years becoming the dominant power in this trade route.

Note that at this time, India was still just a prized trading partner. Territorial expansion, much less an empire were a distant dream, minus the resources that the Industrial Revolution would bring and the presence in India of powerful rulers like Aurangazeb and Shivaji.

So even while the shareholders of the East India Company were rolling in cash, a powerful backlash was building up against the company in England, on the basis of the same false mercantile theory that had held back Spain a century ago. The company was accused of impoverishing England by despatching bullion to India.

Fortunately for England, she had a strong merchant class who from real experience of distant commerce correctly understood that gold must be allowed to find its own natural price level, or must simply fall in value.

The rest as we know is history. England went on to build one of the largest and definitely most sprawling empire in history, became the most powerful and richest nation in the world. Other European powers achieved similar though modest in comparison successes. Spain went on to lose most of her colonies in the New World and the old, even before the English empire had reached its peak.

And what of the nation that for many centuries bled Europe of its bullion – India? 18 centuries is a long story, but it too was largely hoarded (in different ways and different places). With exceptions like the Cholas and the Marathas, few Indian rulers invested in a navy. Trade with Europe was largely dominated by foreigners, with Indians at best accounting for the first leg of the journey to the start of the land route through the Levant. Moreover the hoarded wealth was easy picking for invaders whether from the Afghan passes or the sea trade routes from Europe.

It must be noted in conclusion that the British Indian Empire was originally built as a commercial venture by a trading entity which would have been a non-starter if the British were paranoid of bullion (or excess reserves) leaving their shores.