Impact Of First Ever Negative Credit Ratings On China

Impact of First Ever Negative Credit Ratings On China

Like India’s PSU banks owning up to its humungous NPA problem that involves practically the Who’s Who of Indian business and Industry, alongside its medium to small players, China too is also facing up to its massive debt now.

China had also hidden it away, undifferentiated between the recoverable and the bad debt, so far, under multiple headings and separations between central, provincial, and local government.

But, along with the worrisome news flow from China’s opaque financial system, there are increasing global concerns on whether it will be able to manage its economy without dreaded severe dislocation. These, if they come, will have a serious knock-on effect, a new financial tsunami, sweeping over an already battered and fragile world economy, as well as on the one and a half billion Chinese people themselves.  Could a Chinese financial collapse trigger a new recession/depression far worse than 2008? Yes, it definitely could.

Is there any chance of an implosion? It depends, as it has, in the West, on the sheer size of its bad debt, from its decades of borrow-and-spend state run growth. How much is still hidden away?

There have already been a number of steep and unprecedented falls in the Chinese stock markets where the people punt, and quite a bit of involuntary devaluation in the Chinese external currency, the Yuan.

The Chinese government has responded with cuts in the bank reserve ratios, rendering them more precarious in effect, and arbitrary containment actions on the bourses, to try and artificially break the fall and control the rates of descent. So far, they seem to be coping, but it is difficult to gauge the extent of the rot.

China had already been firmly down-graded to ‘Negative’ from ‘Stable’ by the important international credit rating agencies: Moody’s and Fitch on 2^nd March 2016.

This was an important marker of international sentiment and outlook for the $12 trillion economy. But the revision in financial confidence was largely resented and criticised as an over-reaction by Chinese officials and insiders themselves.

Still, the downward ratings early in March seemed to assert that whatever the Chinese authorities have been doing to fix their economy over the last year, has not delivered up to expectations.

And this downgrading has been applied to China’s credit rating for its government borrowing programme in bonds, both from the mainland and Hong Kong, as also, as of the 31^st March, more ominously, to its overall sovereign rating.

Coming on top of calls for Xi’s resignation from open letters online and a domestic Chinese media watchdog website, and grumblings in the Chinese establishment on the present leadership, the downgrades may spell out further trouble and forecast destabilisation. This even though the Chinese authorities deny any such possibility, cracking down swiftly at the first signs of unrest.

 But nevertheless, not only will the rerating have a profoundly negative effect on China’s ability to borrow internationally at favourable rates of interest from now onwards, till the position is remedied, but it will also put considerable pressure, downwards, on the value of its currency- the domestic Renmimbi and the external Yuan.

China says that its present credit ratings still best those of any others in the region, though it no longer compares with the stronger No. 1 US  economy, that is actually growing again.

 A more or less universally negative credit rating has been applied to the second largest economy in the world though for the very first time, and there are comments that this could be extended further if things do not improve.

Reasons being cited by S&P, Moody’s and Fitch, amongst the biggest and most internationally respected credit rating agencies, include ‘deteriorating fiscal strength, falling foreign currency reserves, and uncertainty about Beijing’s commitment to reforms’. There is also criticism of further and new rising debt and enhanced capital outflows. The rich Chinese are buying properties abroad, especially in the West, and moving their money out of the country.

The first to cut forecasts on China’s future outlook on 2^nd March were Moody’s and Fitch. They have now been joined, on the 31^st by Standard & Poor (S&P), which has cut China’s sovereign credit rating to ‘negative’ from ‘stable’, while holding its credit rating at –AA.

It did likewise for specially administered Hong Kong, moving the outlook to ‘negative’ from ‘stable’ as well, though once again retaining its credit rating   for the island’s paper at AAA.

Criticism of these moves has come also from certain experts and economists from within China, over this month, who say enough notice is not being taken of the efforts to recalibrate the economy for sustenance over the medium term. But the fact is, China’s economy is operating at ‘a 25 year low’, and there are massive challenges, given the weak state of the global economy as well.

However, putting a negative tag on the world’s second largest economy is portentious, and difficult to shrug off.  Will it affect China’s many infrastructure building projects abroad, and indeed its ability to influence world events, with its financial muscle dwindling?

By way of contrast, despite a sharply slowed Indian economy in the 2012-2013 period, still struggling to find its stride in 2016, a negative credit or sovereign rating has never come to visit so far.

Of course, India’s economy is only valued at $2 trillion. It is a minnow economy, with little leverage beyond its   already compromised banking system, unlikely to have too much of an international impact either way. But its relative good health due to conservative management, and the size of its large domestic market, is attractive, at a time when all other large economies are either stagnating or growing weakly.

Today, India is, as is   frequently pointed out, growing faster than China, and is, bizarre as it may sound, versus the on-the-ground lack of evidence, the fastest growing economy in the world.

India is clocking its GDP at some 7% to 7.5%, nearly a whole percentage point or more than the erstwhile Middle Kingdom. It gets points for its rectitude and discipline, deciding to stick to its fiscal deficit target of 3.5% of GDP, and also enjoys an admirable current account statistic. It also has fairly buoyant foreign exchange reserves in the region of $ 350 billion. It is expected to resume cutting interest rates in the next RBI review slated for 5^th April, given a stable inflation scenario. The rupee is not sliding quite as fast as it was against the US dollar either, and it is fixing its banks.

The difficulties it faces are a much slowed economy, except for government investment in infrastructure. There is no new investment cycle emerging as yet, slow exports, a moribund stock market, very little new job creation, and not much progress as yet on ‘Make in India’ or indeed on structural reforms.

Still, in a comparative scenario with the region and the world, there are several Indian initiatives that should bear fruit shortly including the benefits of increased FDI and greater governmental momentum.

China’s rerating could certainly send more foreign institutional investment towards India, as long as both economies keep their heads above water, and China makes no big, swamping wave, of it.  

For: Swarajyamag

(1, 194 words)

March 31^st, 2016

Gautam Mukherjee

Labour Reform Will Send Strong Signals

Labour Reform Will Send Strong Signals

Consolidation in the BJP reforms strategy is indicated by a new assertiveness. This, alongside a corresponding firm handling of irresponsible opposition moves is starting to pay off.

There is news that the NDA proposes to table five new Labour laws to reform and consolidate over 40 laws, originally Victorian, probably from the early Industrial Revolution. These were made more stringent in favour of workers/labour/employees, under the socialist dispensation, for all the years since Independence.

Still, since 90% of small Indian enterprise is in the ‘unorganised’ sector, it stayed out of reach of all or most of these complicated laws.

So this move, on the cusp of two years in office, is calculated to attract big investment from abroad. The government has worked up the dander to try to run the gauntlet of opposition parties, trade unions, Leftist intellectuals, taunts of crony capitalism etc..

This set of five bills- codifying and modernising all the labour related legislation, will mark the very first comprehensive reform of the mass of outdated and obstructive labour laws that have long been hampering the growth of medium to large Indian business and industry.

They constitute an Industrial Relations Code Bill, a Wage Code Bill, a Small Factories Bill, and two amended bills- the Shops & Establishment Amendments Bill and an Employees’ Provident Fund & Miscellaneous Provisions Amendment Bill.

This new Labour legislation will be tabled, soon after April 25^th ,when the second half of the budget session commences. If passed, it will considerably boost foreign investor interest in manufacturing in India, one certain way to deliver on some or all of the millions of new jobs needed, though the opposition may not agree.

The key difference under the new Labour Laws will be in an unprecedented flexibility in both hiring and firing. This is in line with  competitive international environments, that are welcoming foreign investment elsewhere. It is also a long-standing demand of those countries, like Japan, which have already pledged billions of dollars in investment in India.

Currently, it is almost impossible to terminate the services of an employee, or stop paying wages and benefits, even if the business is closed down.  The present laws have been used mostly in a negative manner, by both in-house employee trade unions, and the broader affiliated trade union universe, at the city, state, and national levels.

Plans of consolidation, modernisation, mechanisation, are routinely held up or stymied altogether, by trade unions, who want to be assured that there will be no job cuts or efficiency/higher performance demands. And the political establishment has, till now, sided with these self-same bodies, against the owners of business and industry, both in the private sector and in the government-owned public sector.

So, few attempts at seeking greater efficiency along with growth and expansion have been successful. As  a consequence, most factories and even service businesses, employ contract labour, and even higher ranked personnel, that can indeed be hired and fired at will, and do not qualify for pensions, provident fund and other benefits, under the present laws.

Many of the present thicket of laws also contradict each other, leading to confusion and protracted litigation.

The overall, anti-capitalist mood and socialist hangover from this history still persists in 2016, but alongside a new found resolve to achieve high single, if not double-digit GDP growth rates.

This being the only way to dent, and eventually eliminate, India’s endemic and chronic poverty at the base of its huge population pyramid. And since high growth rates first entered the equation in the mid-eighties, the salutary effect on extreme poverty has been well noted. It has affected the aspirations of the poor voting public who want more, and the political class is on the spot to deliver or be voted out.

It has lifted the economic circumstances of millions of Indians, even as the population has grown three-fold since 1947, and stands at over 1.2 billion currently.  So even those who do not readily agree to the trickle-down effect of GDP growth rates, end up attributing other reasons for the undeniable phenomenon.

After all, nobody was lifted above the arbitrary and extremely modest poverty-line before, and this did not happen at all when India progressed at no more than 3.5%  per annum.

Most of those socialist years till the eighties, had GDP hovering at a disgraceful 1 to 2 per cent, without adjusting for inflation, which ran as high as 20-30% per annum, and an occasional year returned even a minus 5.2%  rating!

The BJP, traditionally a party supported by the business community and the upper castes, has in the 2014 general election, enlarged its constituency to embrace the rural voter and the poor from other castes, as well as various other religions/communities beyond its traditional support base, including some 10% of the Muslims. Its message of ‘Sabka Saath, Sabka Vikaas’ is still resonating with the masses, even though there is some disappointment with the pace of progress achieved so far.

The new Bankruptcy Law which seeks to empower creditors to intervene before an enterprise is beyond redemption is also expected to be passed soon, perhaps along with the GST law. Should all three sets go through, the knock-on effect on GDP could push it up by 1 to 2 percentage points, particularly in what is now likely to remain a declining interest cycle and a time of lower and stable inflation. The strict control of the fiscal and current account deficits, if not the revenue deficit still, has contributed to a favourable outlook as well.  

In the first part of the budget session concluded in March there have also been a couple of legislative breakthroughs. The successful passing of the Real Estate Bill and the Aadhar Bill augur well for the future.

The first law will go a long way to restore both consumer confidence, professionalise the builder/broker/construction sector, and revive investment, particularly private equity and foreign investment, in the moribund residential/commercial building platform that accounts for a fair chunk of GDP, certainly upwards of 9% inclusive of associated industry and trade, and provides a great deal of labour employment too.

With plans for housing for all and smart cities this is a sector to watch and along with infrastructure also on fast track, it could altogether account for 25% or more of the total before too long.

The second law passed will be far more effective than heretofore in the targeted delivery of subsidies and compensatory payments, as it will go directly into millions of Aadhar-linked bank accounts. It has the secondary effect of consolidating the government’s early programme to  empower and bring more and more of the ‘unbanked’ into the system.

For: The Pioneer

(1,107 words)

March 29^th 2016

Gautam Mukherjee

Nordic Noir: The New Hot Spot For Crime Fiction

Nordic Noir: The New Hot Spot For Crime Fiction

The alliteratively named genre, Nordic Noir, interchangeably, if not hundred percent accurately, with Scandinavian Noir, or Scandicrime, or Scandinoir, began to come to the notice of other parts, way back in the 1960s.

That was when the first Scandanavian ‘police procedural’ novels went to other parts of Europe, and across the Atlantic.  Walter Mathau starred in an early adaptation of Per Wahloo’s The Laughing Policeman in the 1970s, featuring as the influential but ordinaryman detective Martin Beck.

But by 2016, after the phenomenal success of Stieg Larsson’s posthumously published Millenium Series of Girl with this-and-that books/films, it is a stylish wave that has swept all before it. Larsson had planned 10 books in the series before he died just before the first one was published, but now, a fifth, is being written by another writer, to keep the juggernaut moving.

Scandanavia then, is the definitive region from which crime fiction incorporating existential philosophy, humour, perversion, social commentary, rebelliousness, more, all rolled up in a wrap of blood, murder, detection, stoic police procedure, and meticulous forensics, emanates, no, gushes forth.

The Scandanavian landscape, ‘vast alvars, ancient stone, dark shores’, as New York Public Library (NYPL), Photograph Librarian Jeremy Megraw writes, is a partner in crime, along with the ‘humanistic…whose thoughtful investigations serve as a prism through which we view the ills of society’. In Scandicrime, more often than not, the ‘ills’ reach very high up into the power structure.

Megraw also points out the incorporation of the ‘supernatural strain’ of ‘ghosts, changelings’, that complement perhaps the legacies of ancient myth and legend, not to mention the surreal Northern Lights.

But, in all this, let us not forget the misanthropy, the endearing fatalism and irony, probably a by-product, counterpointal, who knows, of the hot summers, the famous skinny-dipping, the attractive sexual liberation, the cheery fjords.

Roll over Britain & America, once the haven for crime writing and detective/private detective genres. But those were the adventures of quaint granny detectives, country policemen on bicycles, Belgian egg-head detectives with waxed and pointy moustaches, mostly set between the two world wars.

Some of this has been able to stay stubbornly current in West End theatre, and in glossy costume/period TV mini-series, but they agitate a certain impatience for depicting another, seemingly altogether unhurried time.

Then there’s Sherlock Holmes, written even further back, in the 19^th century. But Sherlock, Watson, Irene Adler and Moriarty, are still alive and kicking, remade into new TV serials and films, using vigorous contemporary stars and dollops of poetic licence. And there are many well received cops  and detective movies  and serials over the years on both sides of the Atlantic. But, the Scandanavians score, because of their psychological nuancing, and perhaps they seem exotic, compared to the Brooklyn cop or the Jaguar driving British detective.  

The British meanwhile, are  also holding fast to Ian Fleming/the Broccoli franchise of  James Bond, the John Le Carre creations, and other spy/espionage/secret agent sectors. But here too, MI6 is having to share space with the vibrant Mossad inspired Israeli tales, and the CIA/FBI via the ever enabling vastness of the US.

The once celebrated but now almost forgotten Erle Stanley Gardner and Raymond Chandler books from American paperbackland, all set in the fifties, are now quite dated.  

A turn or two was all she wrote for once enduring comic strip/book creations Dick Tracy, Rip Kirby, Bugsy Malone, kinky female dominatrix Modesty Blaize, all residing on the edge of Gangster Gulch and Mullholland Drive. They too alas, have faded away, along with their macs and hats, donating their memory to brash revivals of Dr. Jekyll & Mr. Hyde.

Crime-fighters in the Marvel and DC super-hero comics, the Lee Falk creations, have survived with bells on. They are big business, morphed into grand theatre-class screen players, assisted by star power, costumes, state-of-the-art computer graphics, 3D, and new, ‘inspired-by’ scripts.

Cut to the crime story present- in computerised, internet/smart phone driven times, all the most captivating whodunnits, between covers and on Kindle, are almost exclusively from Scandanavia.

But why are Scandavians so good at this? Simple, direct writing, with most structured around the doings of ‘unkempt, unhealthy, stoic’ policemen, whom, ‘serial killers chide about their cholesterol,’ as Megraw puts it, may be the first reason.

But the books are also riveting explorations of chilling murder and violence, made oddly funny, leavened with uncompromising moral depravity, misogyny, incest, rape, pedophilia, sadism, fascism, marxism, the inequities of immigration and mad relatives.

And this amongst the apparently well-ordered, almost paradisical settings of polite civic-minded Nordics, and smoothly functioning welfare states with balanced budgets, citizen pension funds and surpluses.

But there are acknowledgements of new political tensions: the strains put on the innate liberalism, the ravages of drug addiction, bigotry, resurgence of neo-racism, the excesses of sexual permissiveness.

So families are routinely falling apart in Nordicnoir, with separations underway, divorces, and children torn between parents. Most Scandicrime wades into this type of everyhome reality, accepting with a shrug that people living in crowded cities can be extremely lonely.

Religion too is gone, absent, AWOL, but the emptiness of atheism creates a void, and seems to have left an ache.

All of Scandinoir is great and gripping at describing meticulous police procedure, psychological profiling, forensics, internet searches, camera surveillance etc., with a magnificent commitment to ultimate justice. It is set in picture-book locales filled with flawed characters, sitting cheek-by-jowl with neat up-to-date skyscraper cities that, just like New York or London, also never sleep. Scandanavia, is, in the end, a compact region, a kind of microcosm. But the thing is, it is also surrounded by vast, cold, oceans, a very undeniable macrocosm.

The Nordic nations do have all the ingredients that make for today’s high-tech world. And bless their bleeding hearts, for looking for trouble too. Like France, Germany, Switzerland, Belgium, tiny Luxembourg, Monaco/Montenegro, like-minded parts of the EU, their neighbours big and small, even wary Britain - the Scandanavians are also busy trying to integrate Syrians, Turks, Sri Lankans etc. into the social fabric.

Their crime fiction reflects all this newness, mixed in with femme fatale blondes, the coarse, lusty ageniks, and nervy tattooed nerds. This very urbanista genre somehow, at least in the West, where empty spaces create sinister tension and imminence, just cannot do without its strange people.

The Swedes lead the pack, with as many as eighteen well-known crime writers. I can count at least another six are from Norway, four from Denmark, and their ranks are growing, with additions coming in from Iceland and Finland too, though Greenland does not seem to have opened its crime fiction account just as yet.

 The big new name? Jo Nesbo from Norway, and his detective, Harry Hole, pronounced Hurler.

Many of the works, particularly in English translation, have reached much larger audiences. Several have been made into films and TV  serials, such as Swede Henning Mankel’s Kurt Wallandar books, and  aforementioned Stieg Larsson’s Girl With The Dragon Tattoo series.

Scandanavia, and crime fiction, may seem like an unlikely pair. And Sweden, famous for the Nobel Prize, Saab, Volvo, Bjorn Borg, Abba,  does not excite any adverse commentary. None of what we know suggests anything sinister under the surface. But then again Swedish prime minister Olof Palme was shot and killed, unbelievably, for more reasons than one, walking home in the early evening, from a movie theatre near his home in Stockholm.

Likewise Norway, with its highest standard of living in the world, its salmon and offshore petroleum, tiny population, also does not set off any alarm bells. But here too, in Oslo, out of the blue, there was a horrendous machine gunning of innocents during a picnic, a shoot-out by a crazy native son, not some foreign Islamic terrorist,  that killed 50 children in cold blood.

It might not be so obvious, but perhaps these people, quirky, dyspeptic,   poetic, are naturals for the genre after all.

For: SirfNews

( 1,316 words)

March 25^th, 2016

Gautam Mukherjee

Return Of The Great Communicator

Return Of The Great Communicator

Nicholas Lemann, professor of journalism at Columbia University, reviewing a recent pair of books on Ronald Reagan in the New York Review of Books writes: “By focusing so powerfully on the language and framing of American politics, Reagan was able to have large effects, in a rightwards direction, on the country’s governance too”.

But first, Reagan the actor, story-teller and spokesperson for various entities including General Electric, a former governor of California, had to secure the Republican Party nomination in a contested Republican convention.

Today, as Donald Trump moves closer to securing the Republican nomination, the contest is being held amidst the consternation of friend and foe alike, as people are searching for an explanation for ‘phenomenon’ Trump.

Trump’s tumultuous progress brings back contrasting memories of Ronald Reagan, an altogether smooth operator, from the self-same ‘party of Lincoln’. Reagan comes to mind, not so much for how different he was from Trump, but because he too had the gift of directly communicating with the people.

In hindsight, amongst several achievements of the Reagan presidency, what stands out is the historicity of what no one thought was happening at the time. It was Ronald Reagan, perhaps already feeling the effects of Alzheimer’s disease, the most hands-off of presidents, who scored high in strategic terms, perhaps even higher than Nixon and his opening up to China.

Today, it is Reagan who is credited with having made the moves that brought the Cold War to an end, and caused the collapse of the USSR.

And this, by the deliberate and conscious, we know this now from the copious Reagan diaries, and seemingly simple expedient, of breaking their bank.

Reagan sharply stepped up the US military budget and launched the colossally expensive ‘Star Wars’ missile-shield programme. He knew the Soviets were having a tough time maintaining military parity anyway, and would simply not be able to keep up.

The long and short of this strategy was that the world, in a binary power equation ever since the end of the WWII, though the Bamboo Curtain too was up, was changed to a unipolar force, with America assisted by its NATO allies, in sole charge.

This is under challenge today from the multipolar narrative, with China/ North Korea/Pakistan emerging from behind the new Bamboo Curtain as a fresh military-economic Axis.

And also other scattered and weaker poles such as a newly assertive Russia under Putin, the much battered BRICS with India standing out from within it, groupings like the G-8/G-20, APAC, ASEAN, the once powerful OPEC now in reduced circumstances.

The EU, home of NATO, is economically battered, and as Trump points out, it is the US that has to finance European security too.

But, even today, the overwhelming military and technological superiority of the American military machine, plus the might of its pre-eminent economy, still gives the US the head-and-shoulders-ahead edge. But yes, its reluctance to commit to any boots-on-the-ground warring, weakens the strategic advantage.

But if Reagan brought about the biggest change in the post WWII scenario, Trump as president, may well be the one to break the back of Islamic terrorism, and also the tacit bid to leverage, power, and influence of Islamic nations worldwide.

He could do this with a frontal assault on its ability to wage terrorism on US territory, leaving other nations to work up similar resolve and commitment for themselves. Trump has no intentions to go on a Dubya style rampage abroad, particularly since oil is no longer in the strategic balance!

 And from all indications, Trump intends to realign other economic and strategic equations also, to suit his unipolar vision for America first. If Reagan busted the Soviet bank, Trump intends to teach the rest of the world about which country is the undisputed boss - but without taking on their responsibilities too. It is a new and unabashed isolationism, because Trump does not see the rest of the world as America’s frontier anymore. But there is the old are-you-for-us-or-against-us assertion.

He has already thrown down the gauntlet to Islamic terrorism/extremism in terms that include bald threats to the families of suspected terrorists, and what Trump considers the legitimate and ‘minimal’ use of torture- waterboarding . This has got most Islamic nations, including ally Saudi Arabia, squealing in outraged protest, but to little effect.

Conventional wisdom across the globe, including amongst his Republican/ Democrat rivals, distinguishes between Muslims as followers of a great religion, and Islamic terrorism, that purportedly ‘has no religion’.

But Trump deliberately flies in the face of this reckoning. He holds all Muslims responsible for this Frankenstein, sprung up in their midst. That moderate Islamic nations have neither protested ISIS, LeT etc. nor agreed to take in Syrian refugees, illustrates Trump’s point.

So Trump has already put all Muslims in the US on notice. He also proposes to prevent Muslims from elsewhere visiting the US, till better security measures have been put in place.

No country with sizeable Muslim populations, have dared to take this kind of tough position, and indeed many liberal regimes, including those in the beleaguered EU, go so far as to refuse to ‘demonise’ their Muslim immigrant populations, even as they are bloodied.

Meanwhile the bombings and killings are intensifying, taking advantage of this moderation, not only in Europe but in Islamic Turkey too. Of course, the ISIS, that has laid claim to the latest atrocity in Brussels, explaining that it, and the Paris attacks before it, are retaliations.

Trump has expressed anger and pointed out that this is exactly what he means. That there are Islamic neighbourhoods in Brussels which are even unsafe for police patrols to enter! And there are similar ghettoes in many other capitals and cities around the world.  

ISIS says everyone who is not with it, Russia, France, the US, UK, are on notice. Of course, they, and other Islamic militant groups, also cite the recent arrest of their operative in Brussels, and the activities of Charlie Hebdo in Paris, as additional reasons.

In addition, Trump has pronounced similarly radical rightwing views with regard to immigration, particularly from Mexico, and has vowed to return jobs to America, with special reference to manufacturing.

Trump’s wild and sudden success comes from having struck a chord with the American people. He is always blunt, very clear and unambiguous,   but also, sometimes, incoherent and evasive. And yet, many people, across the country, as more and more primaries are showing, seem to understand and support what he means.

And he has not alienated as many from non-white ethnic groupings as was hoped for by his opponents and antagonists. Hispanics, ethnic immigrants, and Blacks too, vote for Trump, and in significant enough numbers to see him win.

His detractors, both in the Republican Party and outside amongst the Democrats, attribute Trump’s popularity to a range of outlier issues, holding up his lack of clear policy prescriptions, ignoring what he does say for its unorthodoxy.

Trump is seen to uphold very few traditionally republican positions. He mixes in idea raids into the democrat lines. Then there are other inspirations, presumably from the business world. His detractors mock it all, unable to understand what the public sees in it, and are panicked into jeering denial.

They cite broad sociological markers and trends for Trump’s popularity - public anger with professional politicians, and lightly educated redneck supporters. But they also think he appears to have the antidote to urban poverty and declining middle class living standards. While it is rhetorical, Trump’s critics agree he strikes a chord with his promise to make America great again. Like Reagan’s, the numerous Trump generalisations, work too.

But who would have thought that Trump is proving to be a great communicator by breaching political taboos, shunning excessive political packaging, breaking rules of engagement, going above the heads of the professionals who analyse everything a serious presidential contender says?

Trump has received millions of dollars worth of free-to-air political coverage and analysis. He projects himself as a deal-making businessman, who can be a better president precisely because he has never been a professional politician.

Trump tags his rivals with a taunting descriptor, the now dropped-out Little Rubio, Lying Ted, and the latest- Irresponsible Hillary. He also expects Hillary Clinton to be indicted by the FBI and debarred from contesting for her allegedly illegal and mysterious emails off an unsecured private server as secretary of state. At least, by constantly hammering away at the possibility, he is diminishing her credibility quite effectively.

Whatever happens at the imminent Republican convention, and assuming Trump fords that particular river, in November 2016; it is clear that  he has  shifted American politics rightwards, and in his success might extract some of the poison of extremism from the body politic of the world too.

But this bold and brutal change, flying in the face of a great and paralysing liberalism, reminiscent of Chamberlain’s ‘peace in our time’ trip to Berlin, won’t even be attempted - if Trump is cast aside.

For: Swarajya

(1,495 words)

March 23^rd 2016

Gautam Mukherjee

Anger At Slashed Small Savings Rates:Government Revenues Teetering

Anger At Slashed Small Savings Rates: Government Revenues Teetering

The abrupt slashing of interest rates payable on small savings instruments, has the middle-class, ignored in the union budget, annoyed at this fresh gouging, and worried about their retirement savings.

Particularly, as the NPA ridden banks, offering nothing better, have also cut rates, and the stock markets are in a bear grip too.

Even, if the RBI now cuts repo rates sharply, the beleaguered banks probably can’t lower lending rates with so much bad-debt. This is, in truth, a double whammy, with no silver lining.

The opposition Congress is immediately up in arms. The government is trying to brazen it out, suggesting that a low interest regime for deposits/lending is beneficial in the long run.

But it sounds like a bitter pill prescription from abroad, a requirement against the government’s own long term loan demands, from the World Bank, ADB, IMF etc..

For the public, these savings rate cuts of up to 1%, on the whole gamut, coming back-to-back with a sharp hike in petrol and diesel prices, feels like a grim start to spring/summer.

And these new financial blows have been delivered, seemingly via the back door, just days after the finance minister pulled back, under pressure, from taxing part of the PPF in his budget proposals.

Crude prices, everyone knows, have dropped 75% from its peak, but the Indian public only ever saw an 18% cut in total, issued in dribbles and drabbles, at the pumps. The rest of the oil benefit has gone into an easy dip government revenue generation.

The finance ministry is clearly struggling to garner revenues. Direct taxes are below targets, the government divestment programme at the bourses  is running at less than half levels, indirect taxes, though better, are still  grossly inadequate to finance the government’s ambition.

FDI, looking good, is the great white hope, combined with those long-term development loans.  Frustratingly, structural reform like GST, which can add a full percentage point to GDP, is still pending.

Besides, every initiative costs: OROP, the 7^th Pay Commission, rural upliftment, infrastructure boosts, the revival of the Railways/ power/ mining/ inland and coastal waterways, defence procurement/manufacturing.

The government’s refusal to relax the fiscal deficit target of 3.5% of GDP has been praised by all quarters, but does make it tougher to mobilise resources on a very narrow tax base.

Apologists point out that the PPF, once paying 12% tax free, has been handing out single-digit returns since 2001, and 8.1% tax free is not so bad. International rating agencies like Fitch too, like these cuts, and consequently expect more money to flow into the stock markets.

But the deeper and perennial problem of revenue generation on a tiny base is still not being addressed, resulting in a high direct and indirect tax regime, and the same people having to pay for the entire edifice.

Consider that in India, for many centuries past, almost the only tax applied, was a land based revenue. It was levied on the peasants that worked it, feudal vassals etc. It was rich enough to create and support a network of hundreds of maharajahs plus thousands of rajahs and zamindars, with very low rates of inflation. It also financed at least two immensely rich dynastic reigns-that of the great Moghuls, than endured for 400 years, and the British Raj, spanning another 200 years.

But once we took on Fabian socialism at independence, these universal tax bases passed into history. All agricultural taxes, even on the rich, were abolished forthwith.

A recent report had great and inexplicable riches, multiples of annual GDP, masquerading as agricultural income to bamboozle the tax authorities. It was speculated that it might be the unaccounted monies stacked abroad, brought back in, to avoid being nabbed in various secret bank accounts.

And still, the government has no mechanism to tax this money in the hands of a few hundred immensely ‘rich farmers’. It doesn’t even dare venture into a universal expenditure tax, oft suggested, of say 0.25% , applicable on all bank transactions involving more than a threshold of Rs. 10,000/-  for example.

Yet, only 3% of 1.2 billion are even in the income tax rolls as PAN holders. Corporate taxes too are paid by a small proportion of companies and businesses in the organised sector, while 90% of commercial activity is carried out by the ‘unorganised sector’. Our black economy rivals the $2 trillion official one.

Isn’t the refusal to grasp the political nettle of expenditure tax and imposts on high agricultural income, unfair to all current revenue generators?

For: The Quint

(752 words)

March 20^th, 2016

Gautam Mukherjee

BOOK REVIEW: KAUSHIK BASU'S LATEST BOOK

BOOK REVIEW

Title:                  An Economist in the Real World

The art of policymaking in India

Author:             Kaushik Basu

Publisher:        Penguin Viking, 2016, Pages 228, 2016

Copyright:        Massachusetts Institute of Technology (MIT) 2016

Price:                 Rs. 599/-

Real World Economics

Kaushik Basu is a vice-president and chief economist at World Bank, as well as professor of economics/ C. Marks professor of international studies at Cornell University.

He served a 30 month stint as chief economic adviser to the government of India in 2009-2012.It was a rare foray for Basu, outside academia, theoretical economics, and research, and spawned this engaging book for the layman who wants some insight into how economics in general, and economic policy in particular, works in India.

When Basu joined the government, inflation was raging at between 7-11%, and lasted for the five years 2009-2014,coming after being stable for the previous 12 years.

Inflation is a peculiarly Indian obsession, and trumps, somewhat self-defeatingly, the concern for growth. Basu revisits much worse inflation, in the hey-day of socialism, and on a much lower base of just about $0.25 billion. Those were also the days of the infamous ‘Hindu rate’ of growth - never more than 3.5% p.a..

In 1973-1974, just before the Emergency (1975), inflation never dropped below 20%, and stood at an astounding 33.3% in September 1974!

The new season of high inflation during Basu’s tenure however, sat upon a much stronger economy, reasonably large at $2 trillion, growing at over 4.5% at its worst. And it was back-stopped by a black economy, estimated to be of equivalent size.

Basu acknowledges as much, writing that India’s cash economy probably saved it from the ravages of the post 2008 sub-prime crisis and the borrow-and-spend decades preceding. That downturn engulfed the US and Eurozone, and sent it reeling.

The West chose to stave of recession, or worse, with negligible interest rates, and billions in stimulation money, paid out every month, and for years together.

India picked the opposite course, tightening interest rates, sucking up excess liquidity, even as it widened the fiscal deficit to finance welfare measures.

This choking manoeuvre went on, slowing an 8% GDP growth rate to under 5%, not seen since 1994. But, the inflation stayed high, until falling oil prices brought it down, but only during the successor NDA government.

Basu repeatedly makes the point, in almost every chapter of this volume, that economic policy is just one element in the mix, and only succeeds to the extent that its prescriptions are taken up by the people – provided, of course, other macro conditions both nationally and internationally, are amenable.

He dwells on the theory of the ‘focal point’ first postulated by Thomas Schelling in 1963, wherein the level of acceptance of a new law is based on peer behaviour. It shifts the strategic epicentre, or focal point, to a place where state effort will give best results, assessed along with John Nash’s concept of the ‘Nash equilibrium’. This speaks of consensus brought about by several people agreeing on a preferred course of action voluntarily, as part of his celebrated Game Theory. As an economic theoretician, Basu feels strongly about the people having the last word.

Another concept, beloved of Basu, is ‘the invisible hand’ postulated by that prince of early capitalist thinking Adam Smith. In this, the enlightened ‘self interest’ of the people pushes the economy towards desired outcomes, and economic policy does well to adapt itself to it.

And I suspect, though he does not say it in so many words, in a black and white economy like India’s, where a full half operates as it pleases, the writ of the government is, to that extent, happily compromised.

Basu makes relevant comparisons between what India does, and what other countries, China as yardstick, certainly, but also emerging economies- Brazil, Turkey, etc. have done differently, but does not make any definitive value judgements either way.

But also underlying everything Basu has written in this book, perhaps tantamount to his world view, is the implication that the sophistication and receptivity of the populace, as in First World Vs Emerging Economy contexts, has a major effect on outcomes.   

For: Mail Today

(651 words)

March 18^th, 2016

Gautam Mukherjee

BOOK REVIEW: KAUSHIK BASU'S An Economist in the Real World: The Art of Policymaking in India

BOOK REVIEW

Title:                  An Economist in the Real World

The art of policymaking in India

Author:             Kaushik Basu

Publisher:        Penguin Viking, 2016, Pages 228, 2016

Copyright:        Massachusetts Institute of Technology (MIT) 2016

Price:                 Rs. 599/-

At The Crossroads of Theory  & Practice

Kaushik Basu, a distinguished academic specialised in theoretical economics, international relations and research, works at the highest echelons of the World Bank and Cornell University.  

For a brief season 2009-2012, Basu stepped into the realm of applied economics, when he was the chief economic adviser to the government of India, coming in at the invitation of then prime minister Manmohan Singh.

Coming to India in the backdrop of the sub-prime crisis that was raging in the US and Europe, post 2008, he found India relatively insulated  from its ravages, in part because of the buffer of its black money economy, that saved the banks from undue strain.

This book is largely a meditation on the novelty of those India years, but it refers to many situations in other parts of the world for points of comparison and illustration as well.   

There is a clear divide, economically speaking, of the early decades since independence with its low growth rates and high inflation, up and into the 1980s.

 Then came the path-breaking reforms of 1991, and every chapter in the book is written with a focus on the post 1991 reformist period, with an hopeful eye to the future.

However, Basu’s wry comment on 1991 and the reasons for the momentous changes wrought, was that: ‘for a system resistant to change’ implication that it was the same in 2010, ‘nothing is as good as a crisis’.

He points out, amidst years of the derisively labelled ‘Hindu rate’ of growth that never exceeded 3.5%, that during the Emergency in 1975-76, India saw 9% for the first time. It was almost a harbinger of the post 1994 period.

However, though he points out 1975, Basu refuses to attribute it to the totalitarianism of the Emergency, and hastens to point out that the following year it was down to 1.2% once more. In fact, 1979-1980, saw India’s GDP at a disgraceful minus 5.2%!

Besides, one of the reasons for the Emergency was severe civil unrest, caused, in part, by very high inflation, peaking at an astounding 30% per annum after the oil price shock of 1973.

Inflation, particularly food inflation, was once again a concern when Basu was here, but nothing like it was in the old days. The UPA contained it by using tight monetary policies and high interest rates. But yes, it was one of the causes that led to their loss of power subsequently.

Basu baulks at the notion that ‘text-book’ economic policy alone can necessarily contain inflation, citing contrarian successes in other places such as Turkey and Brazil, where interest rates were lowered despite high inflation, in order to stimulate, and not deflate demand.

In another place, he does say however, that Brazil was well used to double-digit inflation year after year.

What is clear is that Basu’s foundations in macro-economic theory are on full display throughout. But he lays great stock with underlying sociological factors to determine the success rate of policies adopted.

As in his first book, (Beyond the Invisible Hand:Groundwork for a New Economics), he mixes anecdotes and examples, revisiting the concept of the shifting but strategic ‘focal point’ first developed by Thomas  Schelling in 1963. This, leavened by another, the ‘Nash equilibrium’ developed by “Beautiful Mind” John Nash, as part of his Nobel prize winning Game Theory.

The ‘Focal point’, to Basu, is the co-relationship between the impact of new laws, even policies, on economic outcomes. A new law, writes Basu, influences human behaviour in a relative manner, only to the extent one person believes another will be influenced by it. So each person instinctively reacts in consonance with his peers.

Collectively therefore, the impact of new laws, no matter how they are written or what they in themselves intend,  happen in  a  relative manner, and shift the strategic ‘focal point’ to a place that must become the epicentre of the effort afresh.

But, since different laws are received variously, the shift in the ground zero, the ‘focal point’, inclusive of its direction too, is a variable that must be responded to. It is as if economic policy is suspended over a sprung dance floor.

The new law, as a thing written and enacted, has little salience in itself, and even the policing or enforcement of it cannot ensure its willing acceptance. Ideally, it should be voluntarily accepted by most people, leaving deviants in the minority.

The ‘Nash equilibrium’, comes into play when various ‘players’ choose the same option. Basu points out however that there can be several ‘Nash equilibriums’ operating at the same time, calling for coordination between them. But people, somehow, resolve any confusion on their own, via their innate sense of order, by choosing one option above all others,  one they can all generally agree upon.

These ideas, to Basu, are the foundations of proper economic development, because the tool-box of  just setting monetary targets, fiscal deficit limits, setting trade tariffs, banking regulations, etc. cannot work without the backing of social and psychological conditions they rest upon. This, though he’s too polite to say it in so many words, is the difference between a First and Third World mentality.

Basu seeks through his books and his other work to catalyse ‘new ideas for economic policy’. He believes in proposals to stimulate a more perfect competition to engender efficiency, and writes against the rigidities and distortions caused by oligopolies, for example, in the distribution of food grains. Basu favours many small and localised distributors, over just a few nationwide big depots,that can, and do, exert more price and supply controls.

In the end chapters, Basu does to stick his neck out and predict that India will ‘join the ranks of industrialised nations’ with a per capita income of at least $10,000 per annum by  2040, ‘and bring chronic poverty to an end well before that’. He thinks India has reached take-off point, and will maintain ‘a GDP growth rate of approximately 8.5% per annum’.

He revisits the concept of  Adam Smith’s ‘Invisible hand’ mentioned also in his first book, which postulates much of the momentum and order we see in society and economic activity is governed by ‘self-interest’ of ordinary people, and ‘the coordinating power of the market’.

This is, of course, is an elegant invocation of the free-market principle redolent with laissez faire. Basu quotes: ‘there is no economy on earth that is closed and has grown rapidly’, and then mocks it by saying planet earth itself is a closed market, and has done very well for itself, thank you.

But, in almost every instance when he says anything overtly free-market, he hedges his own position with caution, pointing out there are no absolutes that appeal to his common sense.

For: The Pioneer

(1,116 words)

March 16^th 2016

Gautam Mukherjee