Winter Chills for Chinese Economy

For the last two decades, China has outgrown many economies to become second largest economy in the world and achieved this landmark by making its economy an investment driven economy. And for that, it had borrowed huge amount of money from domestic as well as foreign sources. At present Chinese firms have foreign debts to the tune of more than $1 trillion which increasing their default and bankruptcy probabilities in case significant slowdown (that is evident now). Unlike other large developed and developing economies with high GDP growth, the economic prosperity in China has not reached the bottom of pyramid.

The high GDP growth rate in China was export led through leveraged investment rather than consumption. Once the global demand for export from China cooled down because of simultaneous events like global economic slowdown since 2008, problems in Europe, rising costs in China, strong Renminbi Yuan and cheaper alternatives like Bharat, Philippines and Brazil, the GDP growth rate started falling down resulting in lower returns on investments but hardly an concession on exposure. So risk increased but earnings fell simultaneously. This made China less lucrative. So the foreign investors started looking for alternatives to sell off Chinese assets.
To make Chinese economy more investment friendly and lucrative in times of fierce competition, Chinese authorities took some flawed decisions in name of reforms. In a command economy like China, where government has direct interference in investment and consumption level, authorities went on pushing investment but ignoring consumption. Result was in form of huge mismatch in production and consumption. Also at the same time to provide with liquidity and make investment even sweater, authorities allowed stock trading using borrowed funds and also artificially helped markets to maintain uptrend. This provided Chinese citizens opportunities to earn high returns with very low investments and risks. This made prices of stocks unsustainable resulting into crash.
The devaluation of Renminbi Yuan was taken as signal of gravitating problems in Chinese economy. Also there is fear about the probable currency war like 1997 during East Asian Crisis. Though on the surface the current situation in China does not seem to be bad as in 1997 but fundamentals seem to have shaken in such ways that the world stock market is now driven by news from China than the Greece. Oil prices are falling and the stocks markets in Asia, Europe and the US are in seeing new lows. This shows how world in concerned with development in China and it does not seem that China is going to escape from this problem this time so easily and indications are there already.
The efforts of Chinese authorities to contain the fall of the market are not working although huge money has been poured into the market by the government authorities and firms and the falls in stocks markets across the world continues.
As far as Bharat is concerned, if China can settle this problem in short term, then it would be beneficial for Bharat as it will attract more investments for its Make in India and Smart Cities projects. 

(Published in Organiser Issue 13 September 2015)

आज जो ये आज है

आज, जो ये आज है 

कल नहीं रह जाएगा। 

बारिश के बादलों सा 

कुछ बरसेगा 

कुछ रह जाएगा॥ 

हर बात 

हर हस्ती 

हर बस्ती 

ख़ाक में मिल जाएगी। 

फितरत आदमी की

कहाँ-कहाँ ले जाएगी।

भाषा, परिभाषा 

और नियमों का क्या? 

कुछ नहीं रह जाएगा

बाकी अगर रहा कहीं तो

मिथक बस कहलाएगा॥ 

ना तुम होगे, ना रहूंगा मैं

प्रेम अमर बस रह जाएगा॥

ये आज जो आज है 

कल अतीत बन जाएगा॥

------------------------- 

राजीव उपाध्याय

RBI May not Cut Repo Rates

On 4th of August RBI has its Monetary Policy Review meet where it is expected that RBI will take call on cutting repo rates. But it has become very tricky for RBI to take any decision as some macroeconomic indicators seems to be not favourable mainly issue of inflation and this is against the current strategy of RBI. So RBI may decide not to ignore inflationary pressure. As there is considerably higher food inflation for the month of July than June 2015. But if we look at historical data it is evident that higher food inflation in the month June is not uncommon for India and it has become a new normality since long (at least since 2010). Because of seasonal changes India usually witness rise in vegetable prices in the month of July as compared to month of June. So it might be a cause of concern for RBI and RBI may decide to not decrease interest rates.

There is another angel too. According to the recent Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for July, index has increased to 52.1 indicating growth in manufacturing sector. Also at the same time the price component of the manufacturing PMI has not increased in the month of July as compared to June. Rather it has fallen. So RBI may wait for cutting repo rate as manufacturing activities are picking up and also the profit without any rate cut. In this situation RBI may decide to wait and watch than taking any action.

So these two factors together may be reasons for no repo rate cut by RBI in its monetary policy review meet. But I feel that RBI should take a call on cutting repo rates to increase investment by private sector to boost economic activities further.

Digital India in India

Digital India is a very ambitious umbrella program with comprehensive vision that will be implemented across the country simultaneously. If it is implemented properly and as per envisaged vision, this single government program is capable of transforming the economic, administrative and social setup of this country. It will bring about a complete change in economic structure of India particularly rural India.
The vision of Digital India is centered on three key areas:  

1. Digital infrastructure as a utility to every citizen. Government would provided high speed internet, universal mobile coverage, mobile banking, and easy access to common service centers to everyone across the nation and would bridge the digital gap between the urban India and rural India. 
2. Governance and services on demand. There will be integration across departments, services would be provided in real time from online and mobile platform and online citizen entitlements through electronic transaction would be made available to everyone.
3. Digital empowerment of citizens. To empower citizens, government seeks to achieve the goal of universal digital literacy, universally accessible digital resources, all documents and certificates available online.

To achieve these goals, an investment of around 4-5 lakhs crore of rupees is expected in few years by different government agencies and private sector. According to reports by McKenzie and Deloitte, this investment would add around 60 lakhs crore rupees to GDP by 2025. This offers huge business opportunities to the private sector that would eventually increase employment opportunities by creating around 10 lakhs jobs and disposable income of citizens resulting in higher demands for goods and services. This would eventually result into vicious economic circle.
Even in times of WiMax, 3G and 4G, mobile and internet connectivity in rural India is an issue. Even today there are around 42,300 villages where there is no mobile network and government plans to install required facilities for mobile connectivity in these villages and it is possible to connect each and every village optically as the example Idukki in Kerala is very encouraging as this district has become India’s first district to be linked to the National Optic Fiber Network (NOFN).
Similarly providing training and capital to youths in rural/ semi urban areas to set up internet kiosks in the interiors will promote rural entrepreneurship and will make villages economically self dependent and their dependency on money order economy will go down. Gyandoot has proved the same. It is a project in Dhar district of Madhya Pradesh that connects villages throughout the district through numerous cyber-kiosks run by local entrepreneurs. More such projects in are needed in different districts throughout the country to promote the culture of rural entrepreneurship to make villages economically more viable and self dependent.
The availability of efficient mobile and internet network at affordable cost will open the gates of E-commerce to the rural citizens which would facilitate the online selling of local goods such as herbal products, gardening supplies, traditional art etc while shopping for stuff such as electronics goods, solar energy panels etc. If this becomes reality Indian economy in general and rural economy in particular will be revolutionized.

दुनिया का दिखावा

हर किसी की अपनी ही एक दुनिया होती है। एक ऐसी दुनिया जो सिर्फ उसकी होती है और शायद ही कोई उस दुनिया को जानता है। इस तरह लोगों का एक दूसरे से जान-पहचान होते हुए भी अंजान होते हैं। हर किसी को लगता तो है कि वे बहुत कुछ जानते हैं एक दूसरे के बारे में पर वो बहुत कुछ, बस बहुत कुछ ही होता है पूरा शायद कभी नहीं होता और इस तरह से कहीं ना कहीं एक दूसरे से अंजान ही रह जाते हैं और अक्सर ये अंजान शक्स जो इन्सान के भीतर चुपचाप पड़ा रहता है वो इतना महत्त्वपूर्ण होता है कि वो आपको बिना बताए ही आप पर हुकूमत करता रहता है और इस तरह से आदमी वो नहीं होता है जो वो जानता है। और जो होता है उस तक आदमी पहुँच नहीं पाता।

तुम्हारी दुनिया का 

दिखावा कुछ और है 

मेरी दुनिया के 

उसूल कुछ और 

फ़र्क बस इतना है 

कि तुम 

तुम नहीं होते 

और मैं होता हूँ कोई और।

------------------------- 

राजीव उपाध्याय

महान याकूब मेमन की बेगुनाही

सुना है कि इस देश के विद्वान बहुत नाराज हैं। नाराज होने कि बात है ही। होना ही चाहिए। बताइए याकूब मेमन को फाँसी देने की बात कर रहे हैं लोग। कितने असहिष्णु लोग हैं इस देश के और कोर्ट भी कितनी निगोड़ी है! बताओ इतने महान काम करने के लिए कोई कोर्ट किसी को फाँसी की सजा दे सकती है।महान याकूब मेमन ने तो बस मासूमियत से बम्बई में बम ही तो फोड़ने का काम किया किया है। कुछ गलत तो किया नहीं है। क्या इस आदमी को इस देश संविधान अभिव्यक्ति की स्वतंत्रता नहीं देता? भाई याकूब तो अपने मन की बात ही तो कर रहा था बम फोड़कर। लगता है इस देश के लोगों के अन्दर संविधान को समझने की क्षमता ही नहीं रह गई है! कितने भाव विहीन हो गए हैं। 

Smart Cities, their Financing and Challenges

Last month, Indian Prime Minister Narendra Modi announced about the plan to set up 100 smart cities in different parts of country to bring about sea-through changes in urban civic life and behavior with the goals of long term sustainability similar to Stockholm, Barcelona, Amsterdam, Glasgow and Singapore etc. This news has created a lot of buzz and excitement across the world and spectrum. But at the same time this announcement has resulted into a number of questions being put forward from the concept and impact of smart cities on civic life, sustainability and costs.

In a smart city infrastructure is integrated with technology and it effectively enhance quality, performance and efficiency of the urban civic services by actively and effectively engaging citizens using information and communication technologies at lower costs and resource consumption making it more environment friendly and sustainable in long term. Different government services, transportation, traffic management, energy, health care, water and waste management etc may become more efficient because of real time flow of information and responses to the challenges.

Cities and public services providers would be required to upgrade their infrastructure as per the new and innovative technologies and these upgrades would need huge money. So a lot of investment in these would be need of hour. A recent estimate by KPMG suggests that these 100 smarts cities would require an investment of around INR 60 trillion by 2022 and the Government does not have enough resources to finance such a mega project. Indeed government has to explore different models like Public Private Partnerships (PPPs), private investments and government based financing options such infrastructure and municipal bonds etc to covert these proposed smart cities into reality. Also different modes of financing will diversify the risks.

Private sector has to play important and vital roles for mobilizing capital and technologies as well as resources for infrastructure development, logistic planning, technical support and research and development with incremental capital support from government wherever necessary.  Considering huge business opportunities a number of private sector firms have eagerly announced about their motive to invest in these proposed smart cities.  But at the same time it is important that municipal bodies must have enough finances to make necessary civic services available to everyone to make these smart cities pro-people else this scheme would turn out to be just a business where the people at the bottom of pyramid don’t have place.

The inability of the municipal bodies of even the largest cities of India like Mumbai, Delhi, Chennai and Kolkata to arrange funds for different projects basically lies in the huge budget deficit as well as non-transparent reporting standards. So the first challenge is to bridge the gap between the revenues and expenditure by rationally pricing civic services through gradual positive pricing discrimination. It would be difficult for municipal bodies to implement with but it has to be done. The next challenge is to make the financial reporting transparent. Although government has already taken some steps towards it but that is not yielding. But if it is done, these municipal bodies can raise funds through municipal bonds because the present municipal bond market in India is just around INR 14 billion only; not even one percent of GDP at current prices as there is huge opportunities in municipal bonds segment. But at the same time government would have to make municipal bond segment lucrative enough for investors. Also there is huge scope and opportunities for the government to bring in investment from EPFO (Employees Provident Fund organization), and ESIS (Employees State Insurance System), National Pension System (NPS) as well as insurance sector by reforming the investment policies of these organizations.

At a time when there is huge uncertainty where the world economy is moving towards, it would be very difficult decision for the international investors to invest in long term risky project like smart city in a country where bureaucracy is said to be unsupportive and many unfriendly laws (mainly land and labor) and corruption use to put barrier in the process. This is perhaps the biggest challenge for the government to cope with as systematic reforms like such are not done in few days. Rather such systematic reforms often take years and sometimes decades. Also there may be worries on part of revenues for institutional investors as there is no clear-cut model or policy for revenues from public goods and services. So the government as well private firms investing in smart cities need to be very creative to put in a model that can generate enough revenues without depriving people at bottom of pyramid and also make profit. Packaging is important but it is the content that gives result.

Relevance of Economic Theories of Dr. B. R. Ambedkar in Today’s Economic Scenario

As a politician, Dr. B. R. Ambedker is one of the most prominent leaders of India. His contribution to the field of political science in Indian context is path-breaking. The visions and ideals, he preached and practiced, were based on equality, inclusion, participation and eradication of untouchablity. He wanted to see an equal and inclusive society. His ideals and visions relating to political science generated widespread discussion across spectrum but his economic theories have largely been ignored by people in general and in academics in particular although by training and practice he was an economist for years prior to his legal and political career and wrote a number of reports, papers and books on economic issues like The Evolution of Provincial Finance in British India, Ancient Indian Commerce, Administration and Finance of the East India Company, The Problem of the Rupee: Its Origin and Its Solution and many more. But all his contribution towards economic theories had been in shadows of his contribution to theories relating political science. 

Whatever discussion that has taken place till now had focused on the nature of economic theories that Dr Ambedkar argued for. Some economists term him as a monetary economist for his contribution towards Rupee and exchange rate. A few term his as a socialist economist because of his arguments and support for the mixed economy, state ownership and inclusion of each and every section of society in economic endeavor. Also there are a few economists who recall him as a free market economist because of his global prospective and pro-market ideals mainly for works like ‘The Problem of the Rupee: Its Origin and Its Solution’ (1923) and ‘The Evolution of Provincial Finance in British India: A Study in the Provincial Decentralisation of Imperial Finance’ (1925).

All these claims about economic ideals of Dr Ambedkar are to some extent true but tell one sided story. Basically Dr Ambedkar was pragmatic political economic thinker whose goals were to achieve inclusive growth and development and his political thinking and economic thinking were in tandem. No discussion can take place in isolation. Rather it has to consider both his economic and political thinking to reach at a conclusion that can give a holistic picture.

Another Economic Crisis in Few Years May Not Be A Surprise

In a central bankers meet in London, RBI governor Raguram Rajan warned the world about the possibility of a ‘Great Depression’ like economic problem in near future if the central banks don’t work together and in tandem to contain the problems like interest rates differences, economic instability in Europe and slowdown in world economy especially developing economies like China and India although his office issued a clarification later. But previous experiences tell that his assessment might have some indications for the future. In 2005 he had warned about the possible financial crisis in the US when everyone was very much excited about the real estate in the US. But what he had forecasted became reality in 2008 and the whole world is yet to recover from that shock.
Euro is in problem because of Greece debt crisis and the sentiments in Greece are against any restrictions and austerity. If Greece decides to abandon Euro and resurrect Drachma it will have catastrophic impact on Europe because Greece will pay in Drachma and that might not be accepted by IMF because of valuation issues. Also the existence of Euro may come under question as there is a group of economists who are against creations of Euro as they forecasted such problems.
Also the recovery of the US economy is not as expected. The developing economies are slowing down. At the same time Federal Reserve in contemplating the idea of increasing interest rates in the US. This will result in capital outflow from the developing economies leading even lower rate of growth. Also the central banks in different countries are acting as per their national interests and priorities but in an integrated financial world, it is would not be possible for the central banks to act independently without having caused other economies. The priorities in the Europe as of now are to come out of Greece debt problem and for that it require huge money so European countries may divest their stakes in developing countries. The US wants its money back to accelerate economic activities and that it may increase interest rates. At the same time developing economies needs more money from developed world to accelerate growth. These goals are not in tandem but contradictory.
Developing nations are markets for developed countries for highly technical and sophisticated products while developed world is market for less technical products from developing countries. So there is interdependence and if these countries don’t act in tandem another crisis in few years would not be a surprise.

Iran's Nuclear Deal and India

When Europe was busy dealing with the crisis in Greece, the US and other five nations were busy discussing a possible nuclear deal with Iran and finally both the nations that were earlier adamant on their position agreed on a deal. Most importantly, Washington is said be very optimist about the deal. The US hardly has any interest in Iran. If Iran was eager about the deal one can easily understand the reasons but why the US does give any answer. 

Though this deal is between these countries but it will have strong impact on India. India as of now is an important trade partner of Iran even after sanctions from the US. Till now India was either paying in Indian Rupee or selling different goods and service in exchange of oil from Iran. But now India has to pay in the US dollar. This is going to increase pressure on Indian currency reserves as well as exchange rate also. Besides now Indian products will have to face fierce competition with the European nations in a few products in which Europe has competitive advantage over Indian producers. Also India's interests in oil blocks in Iran may also be impacted by the deal and ONGC and other Indian oil companies operating in Iran may have to face competition. But at the same time for India it would be easier to buy crude oil from Iran as the ferry cost would go down in coming days. 

Some people fear that prices demanded by Iran for its oil products now would be higher than the earlier prices. But I see it in different way. It would not be possible for Iran to increase prices to much as the oil production by other oil producing countries has been increased. Recently Saudi Arabia has decided to increase its oil production and refining capacity. So fear of price hike by Iran cannot be sustainable.
Although Iran's Nuclear deal is a good start for the world to move towards a peaceful and prosperous world but at the same time it is perhaps another salvo by the US against Russia that is already struggling because of lower oil prices. By the way it is good for India and obviously for Iran. This will provide cheap oil and some extra bargaining power for India against Russia at different fronts.