Friday, 16 March 2018


Managing an economy with a committee format is a challenge in itself. A professor friend once joked and said that "A Camel is a horse as defined by the Committee".

Inflation based on wholesale prices has been reported at 2.8% and Consumer price based inflation has been reported at 5.1% at these inflation numbers the real interest rate is 3.2% (based on the repo rate of 6% as the nominal interest rate). This must be one of the highest real interest rates in the recent past. When we look at these figures a casual question that pops up in the minds is: Why doesn't the RBI reduce its rates?

Probably the committee form of decision making is the culprit. when the five wise men meet to decide the fate of interest rates in the country, some members tend to look far into the future and predict an upsurge in inflation or a deep plunge in the value of the INR. The members must be thinking really hard about the future and doing a lot of number crunching. This reminds me of another professor of mine who used to say "too much of analysis leads to paralysis". That's the same paralysis that afflicted the UPA government during 2011-2014. I am afraid that the same disease has contracted the NDA too.

A lot of people have been talking about the banking system being full of NPAs and the whole system has gone to dogs. I wish to remind the readers about our government's own quantitative easing during 2008-2012 when the purse strings of all banks were loosened and laid bare before the corporate borrowers, the central banker was "Gung Ho" on having managed the world financial crisis in 2008. This loosening of Banks purse strings has come to roost. The Banks are staring at NPAs from large scale borrowers in the corporate sector.

Whenever somebody points out at the cause of rampant economic mismanagement in the erstwhile regime, one is branded as a "BHAKT". The previous regime has not only been guilty of mismanaging the economy but also played a part in manipulating the stock markets on various occasions. The minister was known to make dangerous statements and pull the market down and then retract the statements to assuage the investors on a regular basis.

Now the new regime is treading the path cautiously and has given the responsibility of setting interest rates to the MPC. Not only that, but the right / responsibility of deciding the GST rates has also been given to a committee of finance ministers (that makes it more than 30 wise men on a committee). Democracy in picking a ruling party and entrusting governance to a party is alright but entrusting major policy decisions to committees slows the entire decision making process and holds the country to ransom.

Hope that some corrective action is taken, some responsibility is taken and not everything is entrusted to committees of bureaucrats.

Saturday, 10 June 2017

Farmers on Rampage

The newspapers and all other media are rife with the coverage on farmers agitation. Voices from all political parties in all colours are striving to show solidarity with farmers.

I have been a farmers grandson and have observed rain based agriculture for 20 years before our farm was taken away by the brutal tenancy act and a bunch of lies.

It is generally understood that small land holdings, depleting water tables, rampant use of fertilisers and chemicals, sparse rainfall have all rendered agriculture nonviable.

The Government of the day is expected to announce a Minimum Support Price (MSP) for agricultural produce. The father of green revolution advises that the MSP should be 50% higher than the production cost.

The Government of the day is also expected to regulate food prices and keep inflation under control.

If the producers of food grains are required to be given a higher price and the prices of food grains have to be kept under control, doesn't this look like a catch-22 situation? Apart for this, the Government has to keep its fiscal deficit under control by cutting down on subsidies. Over an above these pulls and pressures the Government is also under considerable pressure to cut down on agricultural subsidies from the international community.

All this calls for an out of the box thinking and a brainstorming session to find an everlasting solution for the ills of this system.

Before I go about thinking aloud and airing my views about the prevailing situation, let me take the reader back to 2014-15 when, Pulses' prices had hit record highs. a lot was said about the prices of pulses skyrocketing and fingers were pointed at the party in power and accusing them of rigging the prices. It actually turned out that, the farmers had not sown pulses because of bad market conditions. once the prices improved, the sowing area for pulses improved, this led to a bumper crop of pulses in 2016. which has in-turn led to lower prices, leading the farmers to take to the streets, claiming MSP.

This story has repeated in Onions, Sugarcane, Tomatoes, Paddy, Wheat and a host of other crops too. The answer does not lie in MSP or loan waiver. the answer lies in education. In Kannada there is a proverb that goes like this "ಕೋಟಿ ವಿದ್ಯೆ ಗಿಂತ  ಮೇಟಿ ವಿದ್ಯೆ ಮೇಲು " meaning "The knowledge of farming/agriculture is far superior than than any other education".

Now some out-of-the-box thoughts on this crisis.

  • Undertake an agricultural census and digitise the agricultural land holding records.
  • Consolidate Land holdings by clubbing small land holders. Encourage creation of farming co-operatives / companies / partnerships and provide concessions to such entities.
  • Announce income tax on Agricultural income for all individual land owners with a land holding of more than 4 hectares for irrigated lands and 10 hectares for non-irrigated lands 
  • Integrate electronic markets or E-NAM across the country.
  • Declare all APMCs without membership in E-NAM as void. Mandate that all APMCs should compulsorily become members of E-NAM
  • Initialise a licencing process for moneylenders and regulate money lending to farmers. Most agricultural loans from banks are not so bad that they drive the farmers to suicide, but the private loans are the ones that drive them to suicide. But, the blame is always heaped on the organised banking community.
  • Instead of going for complete digitisation of transactions, the better way would be to 
    • Make digital payments compulsory for buying fertilisers and and agro-chemicals
    • Make cash deposits easier by not charging any fees for cash deposits. Banks may charge for withdrawals (after a certain limit), but not for deposits.
    • All kinds of payments to Government and its agencies to be made compulsorily in digital form. This will reduce cash transactions to a large extent.
Unless the agricultural markets are reformed and a free market environment is created, no ray of hope can be seen. Government will have to set up robust systems for free and fair markets to continue. 

A change in the mindset of the farmers will also have to be brought in to emphasise and drill down the fact that the government is just an enabler and not your customer.

Wednesday, 5 October 2016

My reflections at Prabuddha Bharat's STEP 2016

On 24-25 September 2016, Prabuddha Bharat Belagavi had organised a "State of the Nation Conclave 2016" the Conclave was supported by the Visvesvaraya Technological University and Rani Channamma University. The conclave was addressed by renowned speakers and I was also asked to present my reflections on the State of the economy. Below is the text of my reflections at the conclave.

"It is always a feeling of deja vu when you get invited to your home town and are given a chance to address a gathering of delegates in a prestigious conference. I must make it a point to thank Shri L K Havanur, The president of Prabuddha Bharat, Prof Sandeep Nair for thinking about me to be a person of some value to speak to the august audience.

I would  like to place before you my thoughts on three things about the state of the economy.

1. Economic themes post 2014: there is a paradigm shift in the economic themes post 2014 and the new government has been talking about two very important themes;
    a. Ease of doing business: we have been doing business, the wrong way for the past 70 years and have been able to bend rules backwards to accomodate our whims and fancies. The times have changed and also the new regulations on GST will change the way we conduct business in the country. whenever you go to the market to buy anything, the regular question asked is whether you want a bill for the transaction, if you want it then you wil have to pay VAT or sales Tax and the price of the product will go up by that extent. This choice is invariably offered by businessmen of all hues and sizes. With the implementation of GST, the question would become redundant as the seller would have already paid his part of the GST and would be eager to recover that amount from the buyer. Hence learning the clean way of doing business becomes more important. this to my mind is the real contribution in ease of doing business. business becomes easy when every body follows the same rules.
   b. Make in India: there is a lot to be done in promoting 'Make in India', a lot is being done though, labour laws are being tweaked slowly and surreptiously to make it easy for hiring and firing. But the challenges of Make in India are numerous. One of the biggest challenges is the Prohibitive Land proces and highly complex ownership structure of land holdings. this is one obstacle whcih is going to be diffifcult to remove and make "Make in India" easier.

2. Challenges faced by the government in monitoring the economy:

    a. Collecting economic data is a nightmare for our statiticians. Our IIP data is published three months late, Our inflation data is not relied upon by our own industry people. collecting, collating and computing GDP has become a bone of contention between private data aggregators and the government statitistians. Collecting authentic data in a timely manner is a big challenge for a country whose unorganised economy is larger than the organised economy.

   b. Building and maintaining an organised market for various commodities, products and financial services is another major challenge. creating an ecosystem of organised markets and then collecting and disseminating data are two sides of the same coin.

3. What has changed int he last two and a half years?
       a. A very personal example is that I have been asked to be on stage and present my reflections on the state of the economy. The organisers wanted me to talk about my thoughts without asking me about my lineage. This is the biggest change here. Earlier dispensation wanted only those with the right lineage to address gatherings. Being capitalist is no more considered regressive. Still some pockets of the civil (should we call them that) society think that being communist is being progressive. So first victory over the class war has been won by debunking the thought about left leanings being progressive.

     b. We have a government at the centre which has engaged a number of common citizens in a constant dialogue on governance with the help of loca circles and the mygov initiative on the digital platform. I appeal to all of you to please participate on this platform positively and constructively.

    c, Finally you have elected this government in the hope that the government cleans up the house. when you engage somebody to clean your house, remember that the cleaner is bound to reach undr your seat too to get the job done. therefore don't complain that the janitor has reached under your chair too. get up and declare your dirty assets to the government before the cleaner approaches you. these are the last few days available for declaring your black money, make the most of it and declare before the due date.

I would like to end my submission with the following lines

Mera desh badal raha hain, aage badh raha hain.

Thank you"

Tuesday, 3 March 2015

UNION BUDGET 2015-16 My Take


Its been a long time that i have actually visited my own blog and tried to type.

on 28th February we had an amazing session at our college. We had organized a budget viewing session on the large screen at our college auditorium, this was followed by a few remarks by experts on finance, economy, agri-horticulture and taxation.

The highlight of the programme was the presence of Shri. Athani Veeranna, the Chairman of our Institute, who is a leading chartered accountant and an acknowledged expert in taxation matters. He was his usual self in being highly meticulous in pointing out the pertinent facts in the budget and then giving his views on the budget proposals.

Prof B Veerbhadrappa, an economist, Economics Professor and the finance officer of Davangere University who sat through the entire proceedings. He gave a fabulous overview on management of the economy and spoke about the balancing act of the finance minister.

Mr. Basavanagouda, the coordinator of the Tarala Balu Krishi Kendra also did a great job of providing insights into the budget proposals for the agriculture sector. He analysed the proposals with respect to the wish list of the progressive agriculturists.

Then it was my turn to voice my opinion on the budget proposals. A lot has been said about the budget in the last three days but my opinion is my opinion and as always i beg to differ a little from the tread path. So here it goes....

JAM- the Jan Dhan - Aadhar - Mobile troika will necessarily plug the leakages in the subsidy system (a glimpse of the fallout of the troika was evident when the brother of the PM participated in demonstrations)

62% of the tax collections are to be devolved to the states and this is being projected as the spirit of true federalism. I see it in a different light. The center wants to put the onus of providing subsidies on the states so that there can be separate policies for separate states.

one of the visions of the government enunciated was of providing 100% housing by 2022. This is a laudable decision. Industries in cement, steel, housing finance, power and infrastructure can look forward to large opportunities. In fact, the next two decades will belong to the infrastructure industry.

An announcement of setting up an unified Agricultural market has been made, if this becomes a reality, then commission agents in APMCs will have to look for better business opportunities or remodel themselves to be a part of this new arrangement. Anyhow this will change the game for ever in the Agricultural produce markets.

MUDRA (Micro Units Development Refinance Agency) is being setup with a Rs 3000 cr. initial investment, this should pave way for credit availability to small, tiny and micro industries and free them from the clutches of private money lenders. The unorganised market of money lenders charges usurious interest rates and it has become the bane of the businesses at the proverbial bottom of the pyramid.

A bankruptcy code is envisaged to help faster start-ups and faster winding-up of companies. Along with ease of doing business, ease of closing business is also of vital importance so that resources are not wasted on trying to make unprofitable business to survive. This is a welcome move.

A vital point is that NBFC with more than 500cr capital will be treated as financial institutions under the SARFAESI Act. this would prevent the goonda raj prevailing in the private financing of commercial vehicles and tractors.

The Finance minister has promised a universal social security system, I am now feeling that we are truly moving forward to become a developed country. The Atal pension scheme is the right step in this direction.

"Sabka Saath and Sabka Vikas" has also brought in "Nayee Manzil" to appease the minorities with less formal education to start micro enterprises. (if the same was done for all communities then it would have been real sabka saath and sabka vikas). Here the government seems to be wooing the minority just the same way as the earlier governments.

A Rs. 25000 cr Rural infrastructure Development Fund has been announced, good days are here for gram panchayats and taluk panchayats. Hope the money finds its way to real infrastructure.

Apart from the RIDF another Rs. 70000 cr has been announced as investment in infrastructure, supporting my take that this is going to be a decade of infrastructure.

Much needed boost has been provided to the power sector by announcing a policy of plug and play power projects, Ports to be converted to companies (did somebody say Adani?) a start-up fund of Rs. 1000 cr for IT start-ups.

Financial Markets have found a new measures by the merger of SEBI and FMC. A welcome move, for that matter too many regulators spoil the broth, so minimum government is essential for maximum governance. Measures to develop and deepen the bond markets, introduction of Indian Gold coins and authority to FEMA to control equity investments will pave way for better administration, development of markets, freedom from gold imports and a sovereign gold bond to take care of the craze for gold investments.

The central theme of the budgetary proposals seems to be a road map for establishing a cashless society. Ease of doing business has been addressed again in bringing about a public contracts resolution bill ans a regulatory law for infrastructure.

Education seems to be loaded with skill development and not with mind development. A Student Financial Aid Authority to take care of financing the students of higher education is a welcome move but what is needed is "NATIONALIZATION OF EDUCATION" if Modi is being hailed as a Thatcher of India then it is imperative that the BJP with its majority pushes for Nationalization of education. only such a move will be able to provide education to all the classes of people. Germany is a very good example of what nationalized education can do to the country.

A Bank board to be setup and then this is expected to grow in to a bank holdings company. A Sovereign holding company to hold all governments investments, to be managed professionally is the right direction to take. Hope this too happens in the near future.

Finally a commercial division in the courts has been announced, this will pave way faster resolution of business conflicts and lead to better environment for conducting ones business.

I would not like to dwell on the tax proposals, As it is said that Taxes and Death are a certainty and they are not avoidable. Both cannot be moderate, thus less spoken of them the better.

All in all a budget that creates hopes, promises more than it delivers and seeks to flush out black money by making life difficult for offenders. this budget can be called high on hopes and low on real, ground level issues. let's hope that whatever is promised is delivered, as that is all that we can do for the next four years.

Tuesday, 28 January 2014

Indiana Jones delivers a dud again!

It has been a long time that I have written on the economic policy, given my propensity to criticise the economic policies and particularly the monetary policies, I had thought that my days as a critic were numbered with the appointment of a charismatic and learned RBI Governor (Indiana Jones). Alas! that was not to be. The governor blinked again, isn’t it ironic that once one gets on to the chair of the governor one tends to think in terms of the establishment only and also think that all that is done using the monetary policy tool is right?

Lets take a look at the Governor’s statement. The first line states that repo rate will be increased by 25bps and in the ensuing paragraphs (specifically pt no 4 and 5) he goes on to gloss over controlling inflation and how inflation is an unjust tax on the people.

I have a funny feeling that economists always speak something and do something else. (I hope you get the drift… we are surrounded by economist politicians right from the top of the pyramid, everybody has been a finance minister ;))

I would like to reiterate again and again the doctor sitting at RBI HQ does not have the medicine required for the economy and the medicine lies in the cupboards of the FINMIN or the PMO. Unless the political bosses start thinking about supply side of the economics and make things easy for the producers and the processors. It is going to be an uphill task to manage lower inflation rates. Inflation in India is a supply side phenomenon and not a demand side phenomenon, no amount of increased interest rates is going to dampen the buying power. Increasing the producing power by enabling faster credit growth to the industry, approve projects, unshackle agriculture and then see the growth as well as stable prices.

Let’s pray until this happens. All comments are welcome

Saturday, 24 August 2013

Downhill INDIA

This is an article that I wanted to write for a long time and had not found the motivation to do so. We have witnessed the fall of INR and have heard many versions about how to stem the rot.

Here are my views, not on how to strengthen the Rupee but on how to strengthen the country:

India is suffering from high inflation for a long time now and there seems a big gap in the steps that the Indian government has been taking and the results of those steps.

My limited knowledge of economics tells me that the government should

1. Instill confidence in the investors of large infrastructural and industrial projects by clearing the air on land acquisition and financing of projects. Many infrastructure and industrial projects are languishing because of not achieving financial closures and roadblocks in land acquisition.

2. Develop a strong agricultural plan to increase the yields. We desperately need a second green revolution to feed our teeming millions. (No free lunches and subsidized food please, that will lead to a idle population). Our country has been facing a demand led inflation and supply of food grains is not keeping pace with it. All the stocks of wheat lying rotting in FCI storage are best utilized for distribution in the open market rather than waiting for them to completely rot to be then given to distillers.

3. Our country needs a strong manufacturing policy. There is an urgent need to have a policy of increasing capacities in all our industries to meet the growing demand for manufactured goods. Many sectors in our country are oligopolies, unless these oligopolies are broken there is no hope of reigning in inflation.

4. Real estate is the highest employer of unskilled labour and is also the root of the unaccounted money in this country. Firstly, our states have to reduce stamp duty on transfer of real estate and strong regulation to see that actual prices are reported during these transactions.

5. The government either has a monopoly or strongly regulates the markets for basic necessities like coal, power, water etc. The government has to get out of these businesses.

6. Business like Coal, Sand, Power Distribution, are controlled by mafia. Our Law and Order system needs an overhaul. Can there be a time limit for framing charges on anybody who is arrested? If one is arrested, can there be a law that forces the police to frame charges within a stipulated time other wise those arrested can walk free? Such a law exists in the US. Another lacuna is the number of times the cases in courts get postponed. Can there be a law that limits the number of adjournments in court cases?

7. Our financial markets are very shallow, even with a turnover of Rs.150 billion on our bourses in the spot markets, we have situations where insider trading, front running, price rigging and circular trading are rampant in the market. For this turnover there are only 20 million investors who have a demat account (a mandatory requirement for trading in the markets). Unless our markets attract more investors, we will not be able to broaden and deepen our markets.

Another thing that ails our markets is that there are two clear financial markets. the unorganized market full of Ponzi schemes and unregulated lending is draining the economy.

Most of these things that I have mentioned here are repetitions from my earlier blogs. But this is a wish list, and these wishes are being granted by those in power.

Therefore there is more of the same. Let us learn from our mistakes and bring about the required change.

All Comments are welcome

Tuesday, 20 March 2012

Budget 2012-13

This year's budget has four points which have caused anxiety.

1. Raising Service tax to 12% and creating a negative list of services. This act of the finance minister has put a plethora of services in the ambit of service tax. Indirect taxation in itself is a very demotivating tax for entrepreneurs. "Value Added Tax" or excise duty are taxes for adding value to the raw material so that the ultimate user of the goods pays for the labour spent on these raw materials. Service tax is also in the same legion, the ultimate consumer of service has to pay tax on the services consumed. The logic being, our government is not able to tax individuals and firms directly, effectively and therefore they would like to recover taxes from them through this roundabout means. The logic may be correct but it is flawed when you calculate the yield.

Imagine a large industrialist who has more than 50% stake in his public limited company, he obviously falls in the 30% + Surcharge category tax slab. If his company has lets assume a payout of Rs. 1 billion as dividend then more than 50% of that money would come straight to the promoter's pocket and that too tax free!

So our friend promoter now file income tax returns claiming tax free income of more than Rs. 500 million and may be a salary of around 20 million rupees. if he pays 33% tax on the 20 million rupees his tax outgo would be 6.66 million rupees and that would be an effective tax rate of 1.2%. what is the amount of money he would be spending on services to pay a service tax is another question. if he spends around 5% of his residual income on services he would be paying a service tax of approximately Rs. 2.5 million. Compare this with the tax he would be paying if dividends were taxed. If dividends were taxed then the tax that this person would be paying would be 30% of Rs. 520 million amounting to Rs. 156 million.

The excuse put forth for not taxing dividend at the hands of the tax payer is that it is very difficult to implement. All we need is to implement it with the big fish and let the small fry go away. A cursory look at the share holding pattern of large companies in India shows that the most of the companies have promoters stakes above 30%. retail investors account for around 5% of the investors in these companies. therefore it is easier to locate the shareholders and demand dividend tax from them in fact with compulsory demat accounts it is still easier for tax collection. Dividend can also be taxed at source like any other TDS and the companies can be asked to deposit the TDS on dividends. That way it would be the most easiest tax to collect. In times of inclusive growth it is blasphemy to let go large industrialists with small effective tax rates.

So instead of taxing people on the services they avail, it would have made great sense to tax dividends and the government could have mopped up more tax from this exercise.

2. Amending tax laws to levy capital gains tax on transactions outside India, when the assets are in India with retrospective effect from 1962 is a RETROGRADE STEP. Any amendment in tax laws should be for the forthcoming year so that the businesses and the people at large take this as a cue and engage in activities knowing fully well about what part of their earnings need to be share with the government. If the government is going to pull out historical deals and ask for a share in the profits earned in earlier periods, this means that the government is going to wait until you make profits and then lay its claim on its share after the game is over. That's not GAME Mr. Finance Minister! Any tax law which proposes to tax income in future is welcome but not past income. Past is Past Pranabda, please make the rules of the game before the game starts, Indian government is known for changing rules of the game midway, but changing the rules after the game is over is obnoxious and not palatable.

3. Fiscal deficit seen at 5.1%. Should we say this is realistic or should we assume that our FM will be off target by 2% like all other FMs in the past. If he is off target by 2% then it would mean a Fiscal deficit of 7% and that would be catastrophic. If he is realistic,  then what happened to the target of 3% fiscal deficit announced in the previous years? Why can't the government cut costs? stop spending on freebies and concentrate on good governance and prudent financial administration? Are coalition pressures stopping the finance minister from taking bold measures like restructuring the tax rates to increase effective taxation rates of wealthy people and reduce the taxation rates of the the lower and middle income groups? World over there is a growing consensus amongst the rich that they are ready to share their wealth but that is not to be seen in India, why? This approach of floundering on the policy front and squandering the fruits of growth in the last decade will slowly and surely take the country to a 1991 like crisis.

Car Sales for the year 2011-12. Source

4. Increase in excise duty on large cars. Whom are you kidding Mr. FM? Even if you consider all cars of C1, C2, D1, D2 and Premium Category as large cars, the number would be @ 720,000 cars per year, an increase of Rs. 50,000 per car amounts to Rs. 36,000,000,000 that is Rs. 3600 cr. I think that's too much ado about nothing. One more tokenism.

Let's talk about the Rajiv Gandhi Equity Savings Scheme. As a stock market practitioner I still have no clue as to how am I going to tell aam aadmi that he should open a demat account and invest Rs. 50,000 in equities locked in for three years and then he would get an income tax benefit. Seems a far fetched idea! Anyway thats our FM for you. 

As far as the markets are concerned, FII liquidity is still chasing Indian equities, since they do not have any other assets elsewhere worth investing. Around 10 bn dollars have already reached the shores of India in this calendar year and these dollars are giving me the jitters that they may fly back the way they came in, SWIFTLY...

Hoping that the FIIs do not find a better place for investment, our markets will surely go up slowly. technically speaking, the 50DMA has crossed over the 200DMA after nearly a year and a half and has given a good bullish signal. I only pray God that these things will keep the market moving northwards despite the wrong economics.

Have a nice Day