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…)

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
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(Emphasis mine).

Cross posted on Smoke Signals and my blog.

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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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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 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…)

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.

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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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.